To The Moon

In the turbulent year of global stock markets, this performance of US energy stocks has provided "an oasis" for many investors.

US energy stocks rose sharply against the trend this year, becoming the best-performing sector in the $S&P 500(.SPX)$ in the turbulent market.

According to data from https://finviz.com/, as of December 21, the energy sector of the U.S. stock market has surged by 42.6% in 2022, which will record a record annual growth. Among the 11 major sectors of the S&P 500 index, the second largest sector even failed to record positive returns.In 2022, The Covid-19 pandemic and Russia’s invasion of Ukraine have led to major disruptions to global energy and technology supply chains, Which drives soaring prices of energy and materials.

Below are the performance of some stars companies from different energy industries：

Oil & Gas Integrated stars: $Exxon Mobil(XOM)$ , $Chevron(CVX)$ Oil & Gas Refining & Marketing stars: $Marathon(MPC)$, $Valero(VLO)$, $Phillips 66(PSX)$ Oil & Gas Equipment & Services stars: $Schlumberger(SLB)$, $Halliburton(HAL)$,$Baker Hughes(BKR)$ Oil & Gas Midstream stars: $Kinder Morgan(KMI)$, $Williams(WMB)$, $ONEOK Inc(OKE)$, $Targa Resources(TRGP)$.

Oil & Gas E&P Stars: $ConocoPhillips(COP)$, $EOG Resources(EOG)$, $Occidental(OXY)$, $Pioneer Natural Resources(PXD)$, $Devon(DVN)$, $Hess(HES)$, $Diamondback(FANG)$ ,$Coterra Energy Inc.(CTRA)$ , $Marathon(MRO)$ , $EQT Corp(EQT)$ , $APA Corporation(APA)$.

2. Energy Sector will continue to be bullish in 2023

As the tightening policy of the Federal Reserve caused the market to worry about the possible economic recession, doubts about the economic development prospects in 2023 continued. However, the energy bulls said that the industry still looked attractive, mainly because the valuation and P/E ratio of energy stocks in the S&P 500 index were still low, and it was expected that oil prices would gradually stabilize in the future.

Analysts pointed out that although there were some headwinds, the rise in the energy sector continued and was expected to continue to be the best-performing sector in 2023, One of the reasons was that energy stocks were still cheap stocks.

Ben Cook, portfolio manager of Hennessy Funds, predicted that oil and gas stocks would continue to lead the market in 2023. "The energy sector is cheaper than any other sector. At the same time, the energy sector also has the highest free cash flow yield among all sectors. Therefore, I think can lead the S&P 500 index up for the third consecutive year in 2023." He said.

On the demand side, analysts expect a recovery in crude oil demand. 

Robert Minter, ETF investment strategy director of Aberdeen Investment, said, "Unless you think the world is coming to an end, the global demand for oil will return to the pre epidemic level."Looking ahead to next year, the latest forecast of Morgan Stanley on December 14 also believes that oil distribution will rebound to about $110/barrel by 2023, because the rising demand and continued tight supply support oil prices.

However, some analysts believe that the two biggest factors driving the rise of energy stocks in 2022 - profit growth and steadily rising dividend payments may change in 2023.

Neal Dingmann, an analyst at Truist Securities, predicted that free cash flow in the energy industry would decrease by 18% in 2023. Because "in the past two years, it is very unlikely that the downwind factors of raw material prices that have benefited most energy operators will continue. The cost of oilfield services will rise, which will make it more expensive for energy companies to produce the same amount of oil and gas in 2023."

Others pointed out that the trend differences between energy stocks and crude oil prices indicate that energy stocks will struggle in the short term.

Marko Kolanovic, the chief global market strategist of JPMorgan Chase, advised investors to sell oil and gas stocks in the short term, because energy stocks now outperformed oil prices by a "huge" margin. He predicted that energy stocks would fall by 20%~30% in the near future. However, he is still optimistic about the trend of energy stocks in 2023. He said that after the recent decline, energy stocks will rebound sharply and continue to rise sharply in 2023, which is expected to become the best performing sector of American stocks again.

3. Ten Energy Industry Predictions For 2023

Analyst company Wood Mackenzie has compiled ten predictions for energy developments in the year ahead.

Wood Mackenzie presented ten of its analysts’ top predictions for 2023 but noted that unexpected events could forestall some of the events that currently seem likely.

1. Countries will follow US lead in policy support for low-carbon energy

The extended and expanded tax credits and subsidies offered to low-carbon energy in the US Inflation Reduction Act, signed into law in August, has caused companies around the world to reconsider investment decisions. Key measures in the act, including support for wind and solar power, battery storage, carbon capture, and low-carbon hydrogen, simply outshine existing policy frameworks in most other countries.To remain competitive, those countries will have to introduce incentives that are closer in value to what is now available in the US. That will be a net gain for the world, not a zero-sum game: a leveling-up of policy support will unlock new business opportunities for the entire globe.

2. World oil demand growth will bounce back

As 2022 ends, global oil demand is faltering. For the fourth quarter of 2022, we expect a sharp decline in demand of 1.2 million b/d year-on-year. However, we think this downward trend will turn out to be short-lived. We are forecasting a brisk return to oil demand growth next year, with an increase of 2.3 million b/d for 2023, driven by the easing of Covid restrictions in China and the rising use of petrochemical feedstocks. This resumption of the upward trend in demand is likely to jolt the oil market out of its current doldrums and support prices.

3. There will be a slowdown in LNG contract signings

2022 was a busy year for LNG contracting, with deals signed for 80 million tonnes per year. Of that total, 75% was with exporters from the US, and over 50% was for portfolio players and traders. In 2023, we expect contracting activity to slow down.Chinese companies will continue to buy, and US independent upstream and midstream players will continue to secure deals to access global LNG prices. But portfolio players will be more selective, placing their bets only on those projects that can move quickly. Meanwhile, European buyers are unlikely to commit to much supply, as they remain concerned about demand longevity and future pricing dynamics.

4. UAE to ramp up investment in low-carbon energy ahead of hosting COP28

ADNOC, Abu Dhabi’s national oil company, did not set a net zero target in the run-up to COP26 in 2021, even as peers such as Saudi Aramco declared ambitions to be carbon neutral in 2050. In November, that changed: ADNOC announced that it would pursue net zero by 2050 and establish a low-carbon energy division. It has already started to take action to move towards that goal: it is so far the only NOC to pursue renewable M&A, buying into the H2Teeside hydrogen project in the UK alongside BP.ADNOC and the UAE will continue to ramp up low-carbon investment, and this will bring along other oil producers in the Middle East. Their investments in low-carbon energy will increase, and they may also make further international acquisitions in hydrogen, CCUS, and solar, in a wave that could be like the rush of activity seen in the UK and Europe in the run-up to COP26.The UAE and the Middle East could have a similar eureka moment to the Inflation Reduction Act in the US, which promises a boom time for hydrogen, CCS, and solar. A lot can happen when you have the spotlight on you.

5. CCUS will go mainstream with some big investment decisions

After a flurry of announcements recently, companies will finally kick off major projects in carbon capture utilization and storage (CCUS) in 2023. We are particularly watching for hub projects – those that provide the infrastructure for multiple emitters to transport, and store captured carbon dioxide at scale.Up to 30 CCUS hubs around the globe are targeting FID in 2023, and about half of those are likely to go ahead. Who will be leading the way? Mostly the European oil and gas Majors, which have existing positions to build on and ambitious energy transition targets to pursue.

6. US electric vehicle sales will double in 2023

The US has for many years been languishing in a distant third place behind China and Europe for electric vehicle sales, but now conditions are finally coming together in terms of policy, regulations, and product. The Inflation Reduction Act means that GM and Tesla are both once again eligible for the EV tax credit, and other major automakers that would have been capped off by 2023, can now enjoy another 10 years of subsidies.The new EPA regulations set for 2023 will force automakers to reduce fleet-level emissions by 10%, and the cheapest way for automakers to achieve that will be to sell more EVs. Affordable EVs are finally hitting the market in volume.Next year Ford, Hyundai, GM, Subaru, Toyota, and VW will all have compact SUVs on the market with starting prices around US$40,000-45,000. This trifecta of policy support, regulatory pressure, and affordable models will help US EV sales double to over 2 million in 2023, up from 1 million this year. This time next year, everyone will be talking about how the US has finally stepped up to join the global EV battle.

7. Metals prices will fall

Supply and demand balances point to a year-on-year decline in average prices across the metals and mining industries in 2023. Softening demand, stronger supply, and weaker sentiment will contribute to the downward pressure.The construction sector, a key area for iron ore, steel, and base metals, will be a drag on global demand, with the Chinese real estate market remaining sluggish. Meanwhile, supplies of copper, aluminum, lead, zinc, iron ore, and steel will all post higher growth rates than in 2022. The production of battery materials – nickel, cobalt, and lithium – will continue to forge ahead, following double-digit growth in 2022.There are some upside risks for demand. Inflationary pressures are showing signs of easing, and so are supply-chain constraints. That could mean the global economic slowdown is less severe than expected. A recovery in the automotive sector and in low-carbon energy could help offset some of the demand weakness in other consumer-led segments. But overall, we think the prevailing tendency in prices will be downwards.

8. At least one larger independent shale company will break ranks

Once again, tight oil companies are gearing up to act in unison in the coming year. Comprehensive activity and spending guidance for 2023 has not arrived yet. But signs point to a repeat of 2022: single-digit production growth, and spending hikes that will largely just cover cost inflation.Oilfield services constraints and project execution challenges remain obstacles to faster growth. Shareholder returns take priority. But it is not a completely level playing field across the listed E&P sector. Some companies have better balance sheets, better assets, and more established frameworks for returning capital. We think 2023 could very well be a year where the best of the best break out, and decide to grow more aggressively than many stakeholders currently expect.

9. US solar installations will start to recover, despite supply chain constraints

High steel and polysilicon prices, an anti-dumping investigation by the Department of Commerce, and the implementation of the Uyghur Forced Labor Prevention Act wreaked havoc on the US solar industry in 2022. We estimate a total of 18.6 GW of new solar generation capacity will come online in 2022, down 23% from installations last year.However, all the signs point to the US solar industry starting its recovery in 2023. The passage of the Inflation Reduction Act boosts the already competitive levelized cost of electricity from solar. Module prices are set to remain stable as global polysilicon production capacity increases by 70%, and imports that were detained by US Customs despite using non-Chinese polysilicon are expected to be released during the first half of next year.Corporate and utility demand will reach an all-time high, as power prices continue to increase and pressure to meet emissions reduction targets grows. Taken together, those factors are likely to drive a 50% increase in solar installations in 2023.

10. Fortune will favor the bold in oil and gas FIDs

The list of large oil and gas projects nearing Final Investment Decisions has been more than twice the number getting the go-ahead since 2020. Capital discipline and increasingly cost inflation and execution concerns have complicated decision-making for companies evaluating major projects. Continuing tensions between service companies and operators will keep pouring sand into the cogs of the stage gate process for investment decisions. Operators are nervous about cost certainty and service providers are looking to expand margins.Of about 60 large projects that could be ready to go, we think only about 30 will proceed in 2023. But operators should be wary of delaying for too long. The supply chain is not adding capacity quickly enough to avoid further cost inflation. Now could be as good as it gets.

Source: https://www.woodmac.com/news/opinion/ten-predictions-for-2023/

Questions for you:

Which Energy Stock do you like the most?

Do you believe energy stocks will continue bullish in 2023?