Although energy stocks underperformed in 2024, global supply-and-demand conditions indicate that crude-oil prices are likely to remain in an elevated range in 2025, setting up a positive backdrop for profitability—and potentially stock prices—in the sector.
4 reasons for a positive energy outlook (especially for energy producers and equipment and service companies):
- Strengthening global demand for energy
- Increased geopolitical risk
- A tight rein on supply by the Organization of Petroleum Exporting Countries (OPEC)
- A wave of new investment in international and offshore production
Energy stocks lagged early in 2024
In the summer of 2024, expectations that the US Federal Reserve would cut its key policy interest rate contributed to increased demand among investors for stocks with high growth potential, particularly those in the information technology and communication services sectors. The market rotation led to dampened enthusiasm for energy stocks, despite the sector’s strong business fundamentals. The sector’s lackluster performance comes after a −1.33% return in 2023.
A supportive environment for oil prices
Looking ahead, constrained global supply and steadily growing global demand for crude oil provides a supportive environment for oil prices and the corporate profitability of many energy companies. Oil prices are expected to remain healthy and conducive to energy companies’ corporate profitability—likely in the $70 to $90 per barrel range—barring any major changes in the environment, such as a global recession.
The key drivers of oil prices in 2025 include:
- Rising global demand
- Slowing US supply growth as shale drilling matures
- The production restraint of OPEC as key member Saudi Arabia seeks to maintain high oil prices
- Elevated geopolitical risks due to ongoing wars in the Middle East and Ukraine
Year to date through November 2024, the price of West Texas Intermediate (WTI) crude oil—a proxy for domestic crude prices—has remained range-bound at a historically elevated level between $66 per barrel and $87. The price of WTI began 2024 at about $72 per barrel and stood at that level at the beginning of November, after peaking at about $87 per barrel in early April and hitting a low of roughly $66 per barrel in early September. At all these price levels, however, crude-oil sales allow most oil producers to be quite profitable.
Upside and downside risks
Overall, the risk of increasing geopolitical tension in the Middle East could lead to rising oil and global natural gas prices, especially if production from key producers, such as Iran, Saudi Arabia, United Arab Emirates, Qatar, or Iraq, is disrupted by regional security issues. On the downside, weakening global economic growth, particularly in the US or China, could lead to slowing demand for oil and natural gas. Longer term, however, increasing investments in energy production will be needed to meet what we believe will be rising oil and gas demand in the coming years and decades.
The outcome of the recent US election should not have a significant impact on oil markets. The Trump administration will likely want to keep oil prices at moderate levels to limit inflation, and the administration has little ability to increase US oil and gas investment in production. If the administration loosens permits on federal lands, it could modestly increase oil and gas supplies over the longer term in areas such as the Gulf of Mexico. Trump may be likely to take a more hawkish stance on Iranian oil exports, which could elevate political tensions in the Middle East, but he will not want to drive oil prices up for political reasons—so his approach to Iran is likely to be measured.
While some argue that Trump’s "drill baby, drill" campaign mantra is bearish for oil prices, the outlook may be more neutral. Modest, if any, increases in US production could be offset by declines in Iranian production.
Regarding US natural gas, in our view, Trump’s election victory is positive in the longer term because he is expected to lift the Biden Administration’s moratorium on new US liquified natural gas facilities, which could significantly boost demand for US natural gas later this decade.
What to watch: Energy equipment and services stocks
Looking across the sector, the outlook for oil and gas equipment and services, a group that should benefit from multiple years of growing investments needed to support rising demand for oil and gas, remains optimistic. These are the companies that provide the essential equipment and services to produce oil and gas, such as the rigs, crews, and technology needed to drill and complete a well.
Many market participants may be underestimating the capital investment needed to meet the world’s growing demand for oil and gas, as well as the upside and duration of the upcoming business cycle for oilfield services firms. Moreover, there have been several years of low investment in international and offshore markets, which is only recently beginning to reverse course. Generally speaking, it takes several years for longer-cycle international and offshore spending to recover, and the equipment and services industry is still in the early innings of this particular cycle.
As oil producers seek to boost investment in production, they boost spending on energy equipment and services. In the next several years, continued growth is expected in US energy spending and even more so in non-US spending, led by national oil companies in the Middle East. International and offshore oilfield spending takes longer to ramp up than in the US, given that projects often take 3 to 5 years to develop. As production growth from US shale slows and supply from Russia remains at risk, other regions of the world, including the Middle East, Latin America, and Africa, will likely need to ramp up production to meet global demand for oil and natural gas.
Oilfield services firms have the best prospects for growth that we’ve seen in a decade, as demand for their expertise ramps up. Meanwhile, these companies have largely reduced headcount and capacity, and are now experiencing solid pricing power. Overall, the oilfield services industry is known for its high profit margins, which means that when demand and pricing are strong, earnings can grow rapidly.
Fund top holdings1
Top 10 holdings of the Fidelity® Select Energy Portfolio (
- 25.7% – Exxon Mobil Corp. (
) - 5.5% – Cenovus Energy Inc. (
) - 5.4% – Chevron Corp. (
) - 4.9% – Schlumberger LTD. (
) - 4.9% – Canadian Natural Resources Ltd. (
) - 4.8% – Cheniere Energy, Inc. (
) - 4.4% – Marathon Petroleum Corp. (
) - 3.5% – Energy Transfer LP (
) - 3.5% – Occidental Petroleum Corp. (
) - 3.4% – Valero Energy Corp. (
)
(See the most recent fund information.)
For these reasons, Fidelity® Select Energy Portfolio recently had a notably overweight position in energy equipment and services stocks relative to its sector benchmark. Top fund holdings in the equipment and services segment as of October 31 included TechnipFMC (
The outlook for energy is bright
During the past decade, the energy sector has matured and become profitable. It is a competitive, capital-intensive sector that tends to rise and fall with the broader economy. But many companies now generate positive cash flow and allocate capital back to shareholders through dividends and share buybacks.
In managing Fidelity® Select Energy Portfolio, we prefer to invest in companies that can generate competitive returns on capital but trade at discounted valuations, and those that have some sort of competitive advantage, have healthy or improving balance sheets, and that take a disciplined approach to capital allocation. There are many energy companies with these attributes in the fund and, given the sector's favorable business conditions and reasonable stock valuations, the outlook for energy in 2025 is promising.
In this role, Mr. FitzMaurice manages Fidelity Select Energy Portfolio, Fidelity Advisor Energy Fund, and VIP Energy Portfolio. In addition, he is responsible for researching companies in the energy and power sectors. He also collaborates with Fidelity's equity income portfolio managers to expand the firm's value-oriented coverage and works on the firm's portfolio management strategic objectives.
Prior to assuming his current position in January 2017, Mr. FitzMaurice served as managing director of research in Fidelity's High Income division. In this capacity, he managed a team of research analysts and research associates based in Boston and London. Previously, Mr. FitzMaurice was a research analyst in FMR Co.'s Equity division. During this time, he also managed Midcap Financials Pilot Fund, Fidelity Select Defense and Aerospace Portfolio, Fidelity Select Air Transportation Portfolio, and Fidelity Select Transportation Portfolio. Prior to that, Mr. FitzMaurice was a research analyst in the High Income division, during which time he also managed the high yield sub-portfolios of Fidelity Balanced Fund, Fidelity Advisor Balanced Fund, and VIP Balanced Fund, as well as the high yield sub-portfolio of Fidelity Total Bond Fund.
Before joining Fidelity in 1998, Mr. FitzMaurice was an investment banking analyst at Lehman Brothers. He has been in the financial industry since 1994.
Mr. FitzMaurice earned his bachelor of arts degree in economics from Cornell University and his master of business administration degree from the Tuck School of Business at Dartmouth College.
Kristen Dougherty is a research analyst and portfolio manager in the Equity division at Fidelity Investments. Fidelity Investments is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing, and other financial products and services to institutions, financial intermediaries, and individuals.
In this role, Ms. Dougherty manages Fidelity Advisor Energy Fund, Fidelity Select Energy Portfolio, and VIP Energy Portfolio. In addition, she is responsible for researching companies in energy services and steel sectors. Prior to assuming her current position, Ms. Dougherty generated investment ideas across the capital structure of energy companies in Fidelity’s High Income and Alternatives division. She has also previously covered specialty financials, healthcare, and media companies.
Ms. Dougherty began her career as an associate consultant for Bain and Company where she worked on teams advising Fortune 500 and private equity clients. Following that, she worked as an associate at Bain Capital Credit, a $23B credit and distressed fund, where she focused on oil & gas, technology, and auto companies. Prior to joining Fidelity in August 2012, Ms. Dougherty was a research analyst at Pzena Investment Management, a $16B deep value public equity fund, where she focused on aerospace, defense, and industrials companies.
Ms. Dougherty earned her Bachelor of Science in economics from The Wharton School at the University of Pennsylvania, where she graduated summa cum laude, and her Master of Business Administration from The Tuck School of Business at Dartmouth College, where she was an Edward Tuck Scholar.