The first half of the year has proven to be difficult for the energy sector. After being up 59.04% in 2022 against the backdrop of geopolitical tensions and supply threats, it is the worst-performing sector within the S&P 500 in 2023 (down 7.66% year-to-date).
This poor performance is partly due to the 55% drop in natural gas prices. Natural gas had outperformed commodity markets after Russia curbed gas supplies to Europe last year following its invasion of Ukraine, causing an energy crisis of squeezed supplies and record-high prices. However, as is often the case, financial markets overreacted and supply eventually caught up with demand sooner than expected.
In the U.S., total working gas in storage was 2.55 trillion cubic feet as of Friday, June 2, 2023, according to estimates by the Energy Information Administration (EIA), meaning that stocks are 562 billion cubic feet higher than at the same time last year. Yet, the EIA announced that it expected the largest increase in U.S. electricity generation to come from renewable energy and natural gas, with natural gas power generation expected to grow by 3% from June to August 2023.
Following this announcement, ETFs linked to natural gas jumped 3.87% over the week, pushing the energy sector up 1.71% for the week. However, negative flows among natural gas ETFs and diminishing open interest could indicate a potential trend reversal in the coming days.
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