Oil Stocks Are the Perfect Antidote to Nvidia and the Rest of Big Tech

Oil stocks may be the perfect complement. Yes, they’ve been downright mediocre this year, with the

Energy Select Sector SPDR

ETF rising just 8.7% in 2024, well below the S&P 500’s 15% gain. What’s more, the group’s market capitalization is just $1.7 billion, or only slightly more than half of

Nvidia
,

Apple
,

or

Microsoft
.

And with even the largest stock in the group,

Exxon Mobil
,

sporting a relatively small market value of $500 billion, it almost feels like ignoring energy would seem to have little risk at the cost of no great reward.

It would be a mistake. Oil stocks are perhaps the closest thing there is to an anti-tech trade. Since the market’s bottom in 2022, the Energy Select Sector SPDR ETF has had almost no correlation to the Technology Select Sector SPDR or the

VanEck Semiconductor

ETF, and it’s had a negative correlation to both in June, rising when tech falls and falling when it rises. And that could prove very useful if tech starts to tank.

“Obviously Energy’s weight is so small that this would do little to cushion the broad market, but for those that can play it we think it’s worth a look here,” writes Jonathan Krinsky, chief market technician at BTIG.

And energy stocks are acting like they want to make a run as well. Krinsky notes that despite dropping 10% from April’s peak to June’s trough, the Energy ETF has held its 200-day moving average near $88, a comfort for investors worried about further downside ahead. If the ETF can break through resistance in the $91 to $92 area, it “would suggest a new up leg was beginning with a target back into the high $90s,” he writes.

Of course, more than the technicals need to line up for energy stocks to rally. The most important is the price of oil, which needs to at least hold steady, if not rise even more. WTI crude, the U.S. benchmark, has had a decent run since trading as low as $73.25 on June 4, gaining 10% to $80.66 since then. And there’s good reason to think that the rally can continue. J.P. Morgan strategist Natasha Kaneva and team note that demand for oil continues to be strong, with refineries running at full speed, just as seaborne exports of oil from OPEC are hitting their lowest level in two years. If they are right, Brent crude, the European benchmark, should average $84 in the third quarter of 2024, with a peak of $90 hit sometime in August or September.

That would be very bullish for the Energy Select ETF and for oil stocks that have held their 200-day moving averages during the recent pullback. They include

Coterra

Energy,

EOG Resources
,

and

Occidental Petroleum
,

a Warren Buffett favorite.

Exxon Mobil falls into that group as well, and it looks particularly attractive. On Tuesday, UBS analyst Josh Silverstein named it the “best stock to own…for the next five years” across his coverage area. The reason is quite simple: Exxon should be able to grow its earnings and return capital without oil prices rising.

Part of that is due to strength in refining, the $5 billion of cost reductions the company is planning, new oil projects that could add $4 billion to earnings, a strong balance sheet that will allow it to continue paying a dividend and buying back shares, and even its investments in low carbon that could add to profits starting in 2028. Ultimately, that could push the stock to $154, up 35% from a recent $114.41, even if it trades at an undemanding 10 times free cash flow, the stock’s historical average.

And that’s not something you can say about Big Tech.

…