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After two straight record-breaking years, investors that profited from booming oil stocks are now betting on a temporary retreat, as recession threatens economies in the United States and Europe.

A gauge of global energy stocks is set to rise over 35 per cent for a second year in a surge that has propelled Exxon Mobil’s stock to lifetime highs and caused the price of most other oil majors to double or triple from 2020.

But that rally now looks overdone given a darkening macro outlook and the drop in oil, which has almost lost all its gains this year. That has led some strategists and portfolio managers to position for a pullback that could last months until damage from the likely recession becomes clearer.

Long-time energy bull Marko Kolanovic, a global markets strategist at JPMorgan, is among those who have called time on the rally, suggesting investors jump back only once the broader market drops 20 to 30 per cent.

“We believe that there is a tactical trade to sell energy stocks. The catalyst for convergence would be a pullback in the broad equity market,” Mr. Kolanovic wrote in a note to clients, even as he said long-term attractiveness of oil stocks was intact.

Like most cyclical stocks, energy will struggle in a severe downturn. Citi estimates energy has been the worst-performing sector across geographies during past contractions with earnings per share falling by 53 to 124 per cent.


Generali Investments, which oversees €515-billion, has switched to a “tactically neutral” positioning on energy, having been overweight all year.

“Although we still repute the sector structurally undervalued, in the process to deleverage its debt position and with decent cash flow growth in the next few years, we’re taking now a pause,” strategist Michele Morganti said.

Data from BlackRock’s iShares shows investors have pulled money out from its exchange-traded fund that tracks the S&P Global 1200 Energy Index. Outstanding units in the US$2-billion fund have fallen 15 per cent from a March peak to levels seen before Russia’s invasion of Ukraine raised the prospect of supply shortages in the West.

Andrea Scauri, a fund manager at asset manager Lemanik and former oil analyst, expects big energy stocks to retrace, saying recession risks and windfall taxes in Europe could slow the momentum for a couple of quarters.

“I don’t have any European oil major left in my portfolio right now as I took profit on a big outperformance,” he said.

Some are also looking at shorting oil stocks to profit from expected price falls. An equity salesperson at Mediobanca Securities has recommended opening a bearish bet on Italian major Eni for example.

The run has propelled the market value of top six U.S. and European majors - Exxon, Chevron, Shell, TotalEnergies, Conoco and BP - to near US$1.4-trillion, the most since 2008.


Like JPMorgan and Generali Investments, Lemanik’s Scauri remains upbeat on the longer-term outlook following years of under-investment in exploration and given current geopolitical tensions that have complicated supply routes.

He still likes exposure to the sector but through companies that face no windfall-tax risks like pipe-maker Tenaris, shippers such as D’Amico or service providers like Subsea 7 and Technip.

Others are sticking to their bullish calls. Roland Kaloyan, head of European equity strategy at Societe Generale, is overweight energy going into 2023 and sees the potential for new sector highs between the second and third quarter of next year.

The MSCI World Energy Index is up 72 per cent relative to world stocks in the past two years but is down 12 per cent from last month’s four-year peak. Generali’s Morganti said European energy is probably already halfway through its likely decline.

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