The Energy Sector Is Set for Another Banner Year

Editor's note: Most assets got crushed in this year's bear market... but not energy stocks. Today, we're taking a closer look at this trend with a piece from Joel Litman, chief investment strategist of our corporate affiliate Altimetry. In it, he shares one more reason why this sector is likely to keep soaring in 2023...

Oil supply continues to lag demand...

You've probably noticed this whenever you've filled up your gas tank this year.

Folks enjoyed lower gas prices during the pandemic because demand was low. Nobody was leaving home... And they didn't need to fuel up.

This year, we've had the opposite issue. Folks are back on the roads. And the world has lost a huge supply of oil because of the Russia-Ukraine war.

The price for a gallon of gas surged across the country earlier this year. It peaked above $6 in California. While prices have come down a bit since then, they're still much higher than they were for most of last year.

That's because not all fuels have followed the same trend as what you're getting at the pump.

The price of diesel, for example, is still high. It might even be north of $6 per gallon at some gas stations.

Once again, the issue with diesel comes down to supply and demand. And that's important for investors to know as we head into 2023. Let me explain...

We simply aren't making enough diesel.

Diesel powers our road infrastructure, tractor trailers, as well as many farm and construction vehicles that drive the American industrial sector.

Even more important, many folks use heating oil (closely related to diesel) to heat their homes in the cold winter months.

Despite this, no one wants to build new refineries to increase diesel production.

They're worried that high demand is only temporary. Diesel could become less necessary over time as we continue to move toward cleaner energy solutions.

However, the fact remains that we need diesel today. That's why prices are elevated – and will likely remain high for the foreseeable future.

That's bad news for consumers and logistics companies alike. Still, not everyone is losing out over high diesel prices. Just take a look at the refining industry...

It's currently profiting from an imbalance in what's known as the "crack spread."

The crack spread is the difference between what a refiner pays for a barrel of oil and what it sells the refined products for. (Refined products can include everything from gasoline and diesel to jet fuel and many types of plastics.)

Refiners don't really care which good they're producing. As long as they're refining something, they'll make money.

And refiners are making a lot of money based on the current crack spread. Refining stocks – as measured by the VanEck Oil Refiners Fund (CRAK) – are up 18% this year. The S&P 500 Index is down 16%.

You'd likely be happy owning any refining stock today... and in the near future. That's because, while choosing great individual stocks is important, it's not the main driver of investing success.

What really matters is getting the industry right.

That's where our brand-new tool comes in...

It's called the ETF Analyzer. And we're confident it could be a huge asset to any portfolio.

The ETF Analyzer shows us easy-to-understand "grades" based on real, undistorted financials, thanks to Uniform Accounting. Only instead of analyzing the performance and valuations of individual stocks, it looks at exchange-traded funds ("ETFs") and mutual funds.

You see, you're much more likely to find a winning stock when you're already in a winning sector. In fact, more than 50% of a stock's movement can be explained just by its underlying sector...

As the saying goes, "a rising tide lifts all boats." And when a certain industry does well, many of the companies within it are also successful.

Our new tool shows just how much momentum energy has. To see it, we can look at the Energy Select Sector SPDR Fund (XLE). It's an ETF that tracks the performance of the broader energy sector.

The ETF Analyzer shows us that XLE is on an upswing. Higher energy prices will lead to higher returns for energy stocks... So XLE receives an "A" grade for its earnings power trend.

And despite strong and rising performance, the energy sector is still cheap. XLE's Uniform price-to-earnings ratio, which measures how much investors are willing to pay for a sector's earnings, is only 17 times today. That's lower than the 20 times market average, earning an "A" grade for valuation.

These grades paint a bright picture for XLE's performance...

The energy sector has had a great year so far. Now, high diesel prices and natural gas tailwinds are setting the industry up for another great run in 2023.

Our ETF Analyzer tells us the energy sector has even more upside ahead. Don't miss this trend today.


Joel Litman

Editor's note: Energy isn't the only corner of the market that's positioned to soar right now. With the help of this brand-new tool, Joel and his team are shining a spotlight on two other sectors that will take off in 2023. This story is part of a financial event that we haven't seen in 15 years... So don't miss their urgent presentation. Learn more right here.

Further Reading

"The belief in green energy will drive the current fossil fuel boom to new heights," Brett Eversole writes. Most investors aren't thinking about this... But we'll still need oil and gas for the next decade or more. And that's only part of why energy will soar... Get the full story here.

Sector performance is critical. Right now, one powerful U.S. sector has been pouring money into this year's beaten-down tech giants. And as a result, one downtrodden company could soon gain an edge over its peers... Read more here.