S&P 500’s Energy Sector on Pace to Hit Record Growth

Even after a recent tumble in prices due to investor concerns over the Omicron variant, energy has held on to most of its gains for the year. Prices skyrocketed in 2021 after the U.S. eased Covid-19 restrictions and consumers returned to the roads.

Energy costs typically mirror investors’ perspective of the economy’s health with prices dipping with new Covid-19 variants and increased case counts before bouncing back. The high energy prices now suggest investors expect continued growth in 2022 but the role of inflation on prices makes the economic picture less clear.

Economic shutdowns from new variants threaten the energy sector’s prospects in 2022, although local governments in the U.S. so far haven’t replicated the lockdowns of 2020. Some analysts remain optimistic about the sector, citing that an increase in vaccination rates around the world and a growing expertise on managing the virus won’t hinder travel.

Low supply from U.S. producers and the Organization of the Petroleum Exporting Countries also helped elevate prices in 2021.

“Oil and natural gas and unfortunately even coal are going to be pretty critical elements for global economic growth into the future, as well, and investors are finally recognizing that,” said Rob Thummel, senior portfolio manager at TortoiseEcofin.

Companies within the oil and gas exploration and production category have grown the most with shares of Devon Energy Corp. nearly tripling this year.

“It’s going to be another year for potential for outperformance, driven by the return of cash to investors,” Mr. Thummel said.

Among the laggards within the energy sector are companies that deal with equipment and services, storage and transportation, refining and marketing: Baker Hughes Co. advanced 16%, Kinder Morgan added 16% and Phillips 66 edged up 4.2%.

Energy companies focused on returning cash to shareholders through buybacks and dividends, attracting investors. Some climate-minded investors, however, missed out on Wall Street’s hottest trade of the year, over concerns about fossil fuels’ impact on the climate.

Despite the surge this year, big tech stocks continue to drive gains in the S&P 500 because energy has one of the lowest weightage in the broad-based index.

The S&P 500’s information technology sector gained around 60% in 2012, the last time any top performing sector gained as much as energy. The real estate and information technology sectors are trailing energy this year, gaining 42% and 35%, respectively.