Oil prices have improved marginally since the beginning of the year, according to data from the United States Energy Information Administration; however investors should continue to remain cautious of the energy sector, given its first-quarter earnings results and the ongoing geopolitical debates over oil supply levels.
Oil prices and supply
Oil prices have rallied a little in the past few months. Since January 2, West Texas Intermediate oil has improved from $52.72 to $59.44 while Brent oil spot prices have increased from $55.38 to $65.15. However, while prices have increased slightly over the past few months the abundance of supply appears to continue to be a concern for the sector. Oil supply has increased globally from 93.94 million barrels per day in January to an estimated 94.58 MBD in May. The Organization of Petroleum Exporting Countries known as OPEC, specifically has shown an increase from 36.54 MBD in January to 37.33 MBD in April. A recent MarketWatch publication noted possible scenarios for future oil prices with OPEC’s quota as the driving force for future scenario variability.
Energy stocks
First-quarter earnings for the energy sector continued to show the negative effects from oil’s price descent. Exxon Mobil (XOM, Financial) and Chevron (CVX, Financial), the largest two energy companies in the Dow Jones Industrial Average, both beat earnings expectations for the quarter. However, both companies showed significantly lower revenue and earnings when compared to a year ago.
This trend was further exemplified in a comprehensive first-quarter earnings report from FactSet. FactSet reported the energy sector showed the worst year-over-year revenue and earnings decline of all sectors in the S&P 500. Revenue was down 34.6% from one year ago and earnings were down 56.6%. In general, the energy sector continues to appear significantly overvalued with the highest forward 12-month price to earnings ratio of all sectors at 27.3. The ongoing geopolitical debates and declining earnings results signify to investors the need for caution when considering investment in the energy sector overall.
