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Energy Sell-Off Overdone

by: Kashyap Swamy September 10, 2008 | about stocks: XLE    

Kashyap Swamy

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An article posted yesterday pointed out that the S&P 500 Energy Index has been in decline since August 28. In fact, I struggle to find any stock or ETF in the energy universe that has closed up on the day during the past two weeks.

1. Relative performance.

The Energy ETF (XLE) is down 18% on the year while the Financials ETF (XLF) is down 24%. FInancials have been hit by the subprime crisis and at least one large firm (Bear Stearns) has closed shop. I cannot think of any similar "crisis" in the energy sector.

2. Lack of discrimination

One might argue that oil and gas producers would suffer from lower revenues due to lower commodities, but this sell-off has not spared oil services or drillers which benefit from expanding capex programs of E&P companies (ExxonMobil (XOM), for example, plans to spend $25 bn annually between 2008 and 2012). Energy infrastructure builders like Fluor (FLR) have large international backlogs spread across sectors like offshore, power generation and chemicals.

Is there any explanation for this sell-off besides pure panic?

Disclosure: Author holds positions in energy stocks.

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This article has 5 comments:

  •  
    Sep 10 11:37 AM
    It doesn't make sense to me either. No matter what happens to the US economy, you still need fuel and there are always going to be buyers. Unlike the financials, the energy complex can depend on a reliable, steady cash flow. How they use this money should dictate the stock price. Instead, there is some kind of sheep mentality taking over.

    As the world's infrastructure grows, whatever the rate, energy is a necessary component. So I'm going to sit tight and watch the sheep.
    Reply
  •  
    Sep 10 12:03 PM
    Well, one reason for this decline may be that a range of institutional investors have been dumping energy commodities in fear that congress will ban their investments here. There is also probably a tactical issue here---a lot of people smelled a sell-off and wanted to be first out the door. As commodities drop, people sell off energy firms. It is always good to remember that energy firms tend to be high volatility--comes with the territory. Clearly the rate of gains in energy commodities was too high to be sustainable, but the long-term narrative for sustained high demand for energy in the developing world is hard to dicsount.
    Reply
  •  
    Sep 10 12:50 PM
    I suspect hedge funds and perhaps even mutual funds are selling off everything to meet redemptions. There won't be any reason behind market and sector performance so long as the only players left in the game are dumping their mega-positions in everything...
    Reply
  •  
    Sep 10 01:30 PM
    Over and over I hear that the reason for the excessive decline in energy sector is due to hedge funds redemption's or institutional investments. These are explanatory theories which have never been supported by any facts AFAIK. The danger is, repeated often enough, these statements will become accepted as fact.

    Alternative explanations are economic slowdown, conservation, dollar appreciation, plentiful supplies, diminished speculation, cheating on caps by OPEC members, switching to alternative fuels, etc.
    Reply
  •  
    Sep 10 02:18 PM
    OPEC will ultimately set a floor on oil prices. When that becomes clear, energy stocks will stabilize. In the meantime pre-election rantings and ravings from both sides don't help.

    It would help in general if we could get some sensible US foreign policy to stop poking the 'scary' Russian bear in the eye with missiles in Poland, Georgia, etc, which is unlikely to promote friendship, and instead encourage the now much more cuddly bear to align with the EU, US and other democratic nations.
    Reply
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