The biggest obstacle for investors to climb mentally is the fact that the energy sector has underperformed global equities since the oil price peak in 2008 and has now underperformed global equities since 1994. On a relative basis the energy sector is down 75% since 2008 against MSCI World. What’s even more depressing is that the underperformance has happened during low interest rates, which should have benefitted capital intensive industries, and decent oil prices. The conclusion is that the energy sector has too much production and too high operating costs. This will have to change to restore profitability and attractiveness of this sector.
We don’t feel confident in a long-term bet on the energy sector but we are guessing the market is getting too pessimistic on oil demand when we look into the second half. Investors that believe in higher oil prices could add exposure to the energy sector at current levels, but it should be done with a tight stop loss $27.50 using Brent crude.