• The XLE retreats at the end of 2020

• A look at the US leaders- CVX and XOM

• Europe’s BP, RDS-B, and TOT back off

• Strength in the Brazilian PBR shares

• Caution in energy over the coming months

Sector rotation in the stock market can be a powerful force during bull markets. In 2020, the technology sector posted incredible gains. While the S&P 500 and DJIA rose by 16.26% and 7.25%, respectively, the tech-heavy NASDAQ soared 43.64% from the end of 2019 to the final day of trading in 2020. The energy sector was out in the cold as most members suffered losses in 2020.

The bearish price action in traditional energy shares was nothing new, as they had been lagging the stock market for years before the price carnage in 2020. When stocks corrected in February and March, energy stocks went along for the bearish ride.

It is challenging to find value in the stock market these days, with the leading indices trading at record highs. In late 2020, the trend in energy shares began to shift as the top sector members began to rally. Compared to the rest of the market, they offered investors and traders compelling value. Moreover, many of the companies paid their shareholder’s attractive dividends that are above the market’s average.

As we head into 2021, energy shares remain inexpensive compared to the rest of the stock market, but prices have recovered from lows. While they may have more upside over the coming weeks and months, it could be an excellent time to consider taking profits on some of the bargains that were available a few short months ago.

The XLE retreats at the end of 2020

On the second trading day of January, the Saudis announced a unilateral one million barrel per day production cut as a “gift to the world,” according to the Saudi oil minister. The move pushed the nearby NYMEX crude oil price above $50, with shares of the leading oil-related companies moving higher. At the end of last week, the price of the energy commodity was over the $52 level. While 2020 was an excellent year for all stock market indices, the energy sector was a loser.

Source: CQG

As the chart shows, on a year-on-year basis in 2020, the S&P 500 Energy Sector SPDR (XLE)moved from $60.04 at the end of 2019 to $37.90 on December 31, 2021, a drop of 36.9%. While the XLE lost over a third of its value in 2020, it recovered from lows of $22.88 in March and a higher low of $26.98 in late October. Sector rotation in the stock market and a rising oil price pushed the XLE to the $41.42 level at the end of last week. While the level is still well below the 2019 close, it is 53.5% above the higher low on October 29.

I had been advising picking up bargains when it came to the leading world oil companies during the final quarter of 2020. I believed that sector rotation would lift shares as the value proposition was compelling.  After the recent rallies, it could be an excellent time to begin to take some profits on a scale-up basis as the price of crude oil and energy-related shares have experienced rebounds.

A look at the US leaders- CVX and XOM

Chevron (CVX) and Exxon Mobil (XOM) are the leading US oil companies. CVX closed at $120.51 at the end of 2019 and fell to $84.45 on December 31, 2020, or 30%.

Source: Barchart

As the chart highlights, CVX was trading just above the $91 level on January 8, higher in 2021. The sector rotation in the stock market took CVX nearly 40% higher from the October 29 low of $65.16 per share.

XOM closed 2019 at $69.78 and moved to $41.22 at the end of 2020, a decline of 40.9%.

Source: Barchart

After falling to a low of $31.11 on October 29, XOM rallied through the end of 2020 and were trading higher in 2021 at $45.46 on January 8, over 46% higher over the past few months. Even though XME was removed from the DJIA in August, the shares managed to climb because of sector rotation in the stock market and a rise in the oil price.

Europe’s BP, RDS-B, and TOT back off

I had also favored a scale-down buying approach to the leading European oil-producing companies throughout the final quarter of 2020 as they were heading lower.

Source: Barchart

In 2020, BP shares fell from $37.74 to $20.52, a decline of 45.6%. In late October, when crude oil was on its way to the November 2 low, BP shares found a bottom at $14.74. At $24.40 at the end of last week, the shares recovered by over 65.5%.

Source: Barchart

Royal Dutch Shell (RDS.B) moved from $59.97 to $33.61 in 2020, a drop of 44%. In late October, RDS.B reached a low of $21.79 and was trading at $38.40 at the end of last week, a rise of over 76%.

Source: Barchart

Total SA (TOT), the French oil giant, fell by 24.2% from $55.30 to $41.91 in 2020. In late October, TOT shares fell to lows of $28.65 along with other oil companies and the energy commodity’s price. At the end of last week, the stock has over 60% higher at the $45.90 per share level. Since the October low, the European oil companies have posted more significant percentage gains than the US oil giants.

Strength in the Brazilian PBR shares

Petrobras SA (PBR) is the leading Brazilian oil company. Its shares fell from $15.94 to $11.23 or 29.5% in 2020.

Source: Barchart

Like all of the other global leaders, PBR fell to a higher low for 2020 at $6.15 in late October. At $11.69 on January 8, the shares were 90% higher.

Caution in energy over the coming months

The leading US oil companies experienced substantial rallies since late October along with the oil price. However, they underperformed the European and Brazilian oil companies on a percentage basis.

In the aftermath of last week’s events, the US will begin a new era on January 20 with Democrats in control of the executive branch as both the House and the Senate.

The clean sweep in the executive and legislative branches will set the stage for a dramatic US energy policy shift. On the campaign trail, Democrats have advocated for a greener path to energy production. A far stricter regulatory environment is on the horizon, which is likely to limit fossil fuel extraction from the earth’s crust. In March, US production reached a record high of 13.1 million barrels per day. The policy shift will make that record stand for the foreseeable future.

Moreover, the crude oil market’s pricing power could now pass from the US back to OPEC and the Russians. Last week’s production cut from Saudi Arabia and the market’s response was a sign that the cartel will gain power as the US addresses climate change with more regulations in the energy patch. The recoveries in CVX and XOM compared to European and Brazilian oil shares reflects the coming shift in US policy.

When it comes to all oil companies, the sector rotation has lifted the shares by substantial levels. Those who picked up bargains in late 2020 now have the opportunity to take some profits to the bank, which could be the optimal approach to the sector. It is virtually impossible to pick tops or bottoms in any market, and sector rotation in energy could continue. However, the bargains over recent months are no longer available as the energy sector has become far less inexpensive as we move forward in 2021.

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XOM shares fell $0.68 (-1.50%) in premarket trading Monday. Year-to-date, XOM has gained 8.44%, versus a 1.13% rise in the benchmark S&P 500 index during the same period.

About the Author: Andrew Hecht

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...

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