(Barrons) Energy stocks are out of favor, and the drop in oil prices isn’t going to help.
Fund managers had less money in energy stocks heading into this year than at any time since December 2020, according to the latest Bank of America Global Fund Managers Survey.
On the one hand, it’s a bad sign that the smart-money crowd is so negative about energy. With oil and gas prices stuck in a downtrend, few investors see reasons to buy the stocks.
Things got worse on Monday. Saudi Arabia cut its selling price for oil, sending Brent crude, the international benchmark, down 3.9% to $75.73 a barrel. Natural-gas prices were down, too, dropping 4.4% to $2.77 per million British Thermal Units. The Energy Select Sector SPDR Fund (XLE) was off 3%; Exxon Mobil (XOM) and Chevron (CVX) were down 2.8% and 1.7%, respectively.
Fund managers went from having 4% more exposure to energy stocks than their benchmarks in November to having 11% less exposure in December—the largest month-to-month decline since January 2016. They had 23% more exposure to tech than their benchmarks.
On the other hand, it isn’t always bad for stocks when they’re out of favor. People who bought energy stocks in December 2020, the last time they were this out-of-favor, made off very well.
The Energy SPDR Fund rose 53% from December 2020 to December 2021. Before that, when sentiment bottomed out in September 2015, the fund rose 10% over the next year.
At least one analyst thinks fund managers are making a mistake by allocating so little money to energy stocks.
After the survey came out, Roth MKM analyst Leo Mariani wrote that fund managers are “overly bearish” because they are convinced oil demand is falling fast.
Mariani expects demand to pick up, and for Brent crude to average $85 a barrel in 2024.
“We think there is still likely going to be upside for oil-weighted energy equities next year from current levels, and we would not advocate being underweight energy at this point in time,” he wrote.