Energy stocks get oil price support as recession looms

Surging oil prices charged energy stocks through 2022 and could keep supporting the sector despite a looming recession and stubbornly hot inflation squeezing consumers.

The sector’s 50% gain is a standout in the S&P 500 this year while every other sector has lost ground. Big names like Exxon Mobil are up even more, with gains of nearly 75%. It’s a stark contrast to the benchmark index’s 20% slide.

The sector’s sharp gains were kicked off earlier this year after Russia’s invasion of Ukraine raised worries about the oil supply, with inflation already squeezing global economies. U.S. crude oil prices are up 13% for the year, around $85 per barrel. The U.S. government expects prices to hit $95 per barrel next year, which could potentially support energy stocks even through a recession.

Oil prices got another boost this month when the OPEC+ alliance of oil-exporting countries decided to sharply cut production to support prices. Longer-term trends, such as the shift to renewables, have also kept companies from ramping up drilling. That’s helped maintain a disconnect between still high demand and low supplies.

“Producers are getting signals to stay disciplined,” said John LaForge, head of real asset strategy at Wells Fargo Investment Institute. “They see the future, and drilling and completion of wells are built on a 10-year timeframe and producers see it will be structurally different in 10 years.”

That long-term view has helped maintain a disconnect between still high demand and low supplies.

“A recession takes a backseat to the longer-term secular trend of structurally undersupplied oil,” LaForge said.

Analysts and economists have been warning about a likely recession ahead. Meanwhile major companies have raised the alarm about weakening demand heading into 2023. The Federal Reserve, the International Monetary Fund and others have all warned that economies are in for more pain from inflation.

The U.S. economy contracted in the first half of the year, and consumer confidence and spending are slipping. Inflation remains extremely hot and the Fed is expected to continue raising interest rates in an effort to tame high prices.

That’s raised the risk of inducing a recession by slamming the brakes too hard on the economy. The severity of any recession will also have an impact on the energy sector. A light recession might not change habits too much, analysts have said, while a more severe recession could crimp spending on fuel and other essentials.