Energy is a new theme for 2020. It was the worst-performing sector last year, almost 20% behind the market average in most major markets, and did not act as a hedge to geopolitical tensions, which it has done at times in the past (when there have been concerns over security of oil supply). The price of crude oil fared relatively better, up 27% in 2019, placing it amongst the best-performing commodities.
Several factors turned in the sector’s favour late in 2019, however, which may act as tailwinds in the coming months. These factors included the productive outcome of the 7th OPEC+ meeting, the relative success of the Saudi Aramco IPO and improved forecasts for the global economic outlook. Institutional investors took notice and started to buy from underweight positions.
The recent US air strike on Iran raises fears around oil supply from the most important crude-producing region. This development follows the agreement from OPEC+ to reduce its output target by a further 500,000 barrels per day and, together with a slower rate of growth from US shale production, we are now more positive on the supply side of the oil price equation (although longer-term OPEC+ compliance must come with a word of warning given past violations).
On the demand side, we are heartened by better economic forecasts and possible resolution to the US-China trade war, which should revive international trade, demand from transport and industry and use of the raw material for chemical products. China, which is an important determinant for global oil and gas demand, should continue to drive electrification.
In order to benefit from higher oil prices, the large E&P companies need to remain disciplined in their capacity response. Increasing shareholder value is reliant on the oil companies continuing to reduce capital expenditure. A better outlook is reflected in strong earnings growth for 2020 but not yet in Energy sector valuations.
To read more about our 2020 equity themes, please read our recent note.
Decomposition of Oil Price Dynamics
Source: State Street Global Markets, New York Fed, as of 30 December 2019. The chart shows the weekly Brent crude price change; it always equals the change explained by demand factors plus the change explained by supply factors plus a residual (that unexplained by the sum of the estimated demand and supply factors).
Sources: Bloomberg Finance L.P., for the period 26 December 2019 – 2 January 2020. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future.
SPDR MSCI World Energy UCITS ETF
SPDR S&P US Energy Select Sector UCITS ETF
Share Class Currency
ZPDE (Deutsche Börse)
Borsa Italiana: WNRG
Bolsa Mexicana de Valores:WNRGN
Borsa Italiana: SXLE
Bolsa Mexicana de Valores:SXLEN
MSCI World Energy Index
S&P Energy Select Sector Daily Capped 25/20 Index
No. of Index Constituents
Full physical replication
Full physical replication
Source: State Street Global Advisors, Bloomberg Finance L.P., as of 31 December 2019. Characteristics are as of the date indicated and should not be relied on thereafter.
Annualised Performance (%, Unhedged, in USD)
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