Are oil prices making a comeback? At first glance, it sure looks like it. According to the Commerce Department, gasoline prices rebounded 2.4% in February. And at time of writing this, the average price of gasoline in the U.S. was $2.457 per gallon, according to the U.S. Energy Information Administration (EIA). This represents an additional 4.0% increase over the average price of gasoline on February 23.
Now that spring has officially started, we’re seeing a modest rebound in oil prices. However, these increases are just a drop in the bucket, or rather, the fuel tank. Even including the latest rebound, prices at the pump are still nearly 33% lower than they were this time last year.
And there’s little hope that prices will recover any time soon. Recently the EIA lowered its 2015 forecast for West Texas Intermediate (WTI) crude oil to an average of $52.15 per barrel, down from its previous forecast of $55.02 per barrel. With WTI currently selling at about $48 per barrel, this represents just about 8% to 9% growth.
There are several reasons that gasoline prices are at historic lows. First, the surging U.S. dollar is putting downward pressure on crude oil prices. Amidst this, crude oil inventories have been steadily rising over the past several months and are now at an 80-year high. The glut of refined petroleum products should keep prices at the pump low, and there are even fears that the U.S. will run out of storage capacity for the oil as soon as April.
So it’s small wonder that energy stocks have been underperforming the market lately. The energy sector has fallen 3% over the past month, compared with a 1% pullback in the S&P 500.
The fact is that the energy sector has had the steepest downward revisions to earnings estimates. According to FactSet, the energy sector is expected to see earnings decline a shocking 63.5% over last year. The hardest-hit industries will be oil and gas exploration and production, integrated oil and gas, and oil and gas drilling.
Beyond earnings season, many shareholders are in for a rude wake-up call when it comes to dividends and stock buyback programs. Already we have seen domestic fracking plays like Carbo Ceramics (CRR) cut their dividend payments, and I expect that more energy companies will follow suit.
So for now, I recommend extreme caution when investing in any energy stocks. Sure, there are always exceptions to the rule, so some energy companies will come out of this just fine. But there’s a lot of systemic risk out there in the energy patch, so at the very least I advise you run any potential new buys (or current positions) through Portfolio Grader.