By David Randall NEW YORK - Contrarian investors were rewarded for betting on the beaten down U.S. energy sector earlier this year with a blazing rally. Some believe a tight oil market andSaltWire's Atlantic regional weather forecast for September 21, 2023 | SaltWireNEW YORK - Contrarian investors were rewarded for betting on the beaten down U.S. energy sector earlier this year with a blazing rally. Some believe a tight oil market and resilient U.S.
Bullish investors argue that energy stocks are still cheap by historical standards - and far less richly valued than other areas of the market. The energy sector currently trades at a forward price to earnings ratio of 12.2, well below its historical median forward P/E of 15.3, according to LSEG Datastream. The S&P 500 trades at a forward P/E of 20.
Both forecasts failed to materialize: economic growth in the U.S. proved far more resilient than many had predicted, despite the Federal Reserve’s most aggressive monetary policy tightening in decades. Despite recent gains, the S&P 500 energy sector is up only 4.2% year-to-date, compared with a 38% rise in technology stocks and a nearly 45% rise in communication. The broader S&P 500 index is up about 16%.
While higher oil prices tend to eventually weigh on demand, that is unlikely to happen until Brent rises to between $110 and $120, said Bjarne Schieldrop, chief commodity analyst at SEB Research. Persistently high oil prices could also lead to worries over a rebound in U.S. inflation, bolstering the case for the Fed to cool economic growth by keeping rates higher for longer.