The fossil energy sector was “solidly in last place” in a comparison of 2018 stock performance on the influential Standard & Poors 500 stock index, despite industry spin that had potential investors looking for a comeback.
“The stock market went to hell in December,” writes Tom Sanzillo, director of finance at the Institute for Energy Economics and Financial Analysis, in a curtain-raiser for the new year. “And when it got there, it found that the energy sector had already moved in, signed a lease, and decorated the place.”
Fossil fuel investments took a hit in December along with the rest of the stock market, Sanzillo states. “But here we are taking a look at the full year of 2018, including where the impact of the market downturn ends and where instead oil and gas sector fundamentals explain the sector’s poor investment performance.”
Between January 2016, when the price of benchmark Brent crude oil fell to US$29 per barrel, and January 2018, when it hit a peak of $85, investors were making money on fossil stocks, he notes. “If you invested $1,000 in ExxonMobil on March 28 and sold it on October 9, you walked away with a $131 gain.” But as oil prices began to drop again, that profit turned into a 20% loss for anyone who bought Exxon stock January 1 and held it the whole year.
The overall performance of fossil stocks led to a rethink of the way they function in the market. “Developments in 2016 had suggested that maybe oil and gas companies would mount a comeback to their former place of global leadership,” Sanzillo writes. “But 2017, and now the end of 2018, have shown us something different: oil and gas would lead the way down. In the last quarter of 2018, oil and gas stocks fell more steeply than the S&P 500, and ultimately more than any other sector.”
Fossils that specialize in hydraulic fracturing lost 30% of their value, oil and gas supply companies more than 40%, and “complaints by the industry that their poor performance is in part related to pipeline capacity constraints were contradicted recently by Wall Street Journal coverage that there is no shortage of pipeline capacity, in fact there is too much capacity. The problem is that industry planners spent hundreds of millions putting pipelines in the wrong place.”
For 2019, Sanzillo predicts uncertainty about OPEC’s ability to stabilize world oil prices, with oil and gas demand “increasingly roiled by slower and less energy-intense economic growth, by market penetration from renewable energy alternatives, by energy efficiency, by new storage technology, and by more limited use of automobiles.” Watch for the industry to continue its push into petrochemicals, “but the profit potential in this sector is more limited than oil and gas exploration, and is likely to keep the energy sector at or near the bottom of the S&P 500.”
And while price spikes may deliver short-term profits to fossil producers, they’ll also provoke a political response, including “policies to accelerate away from fossil fuels.”
All in all, “the low-priced, volatile, oil and gas market, punctuated by significant geopolitical realignment, greater competition, a weak business model, and public opposition, is no longer a blue chip investment,” Sanzillo concludes. “2019 will probably begin with a call to ‘buy’, as the oil and gas market has gone to hell and, it will be said, is therefore likely to rebound. But investors would be wise to remember that the energy sector has a long-term lease on that location.”