The best-performing sector in 2022 isn’t done crushing it, Citi says, offering three stocks to buy

You can count on it, says ours call of the day provided by Citigroup, although they say investors can’t expect such high returns.

“We believe the market rotation into energy stocks should continue to run, even as names in our US coverage are already at all-time highs,” a team of analysts led by Alastair R Syme told clients in a new note. “History says energy stocks usually perform well in an earnings recession, Citi’s base case for 2023.”


That bullish view comes after energy returned to the spotlight on Monday, providing at least some distraction from the stock market’s endless bearish debates.

Hitting a level not seen since January, crude fell to $75.08 a barrel on rumors that OPEC was considering an increase in production. A quick denial by Saudi Arabia pushed prices back near $80, where they are sitting for Tuesday.

The oil slump also briefly beat the best-performing energy sector of the year, via the XLE SPDR Energy Select Sector ETF,
to four-month lows before recovering some losses. The ETF is still up a whopping 62% this year, beating all competitors.

To be sure, the path for the commodity underpinning these stocks is murky, with crude struggling to make new highs from a summer run at over $109 a barrel.

But Citi’s Syme and team say they can look beyond the fundamental oil picture, for now.

“Our opinion on the sector comes despite the notion that the commodity price inflation, 2021 and early 2022 story is now largely behind us. We expect oil markets to start seeing inventories build next spring. Gas remains uncertain during the winter, but in general we think the global energy system is adapting to accommodate the European crisis,” Citi said.

As for Citi’s view that energy stocks perform well in a recession, they concede that the highest returns usually occur in the market’s first year of rotation. However, Syme said the outperformance will typically continue until the earnings cycle changes. They raised price targets on several energy stocks and upgraded BP BP

United Kingdom: BP
to buy.

“Without commodity price inflation, asset growth and duration become, in our view, a more important driver of relative equity performance,” the analysts said. Their top three picks in the energy sector are buy-rated BP BP
United Kingdom: BP
— updated Tuesday by Citi — Repsol ES:REP of Spain

and ConocoPhillips COP.

Citi has backed its BP upgrade with some benefits it sees: ratings that put it above European peers; a lack of exposure to chemicals, which they see as a key obstacle for global peers in 2023; and the potential to differentiate around underlying growth, driven by upstream and marketing.

Citi raised its price target for BP to 540 pence from 440 pence a share, while ConocoPhillips’ target was raised by 21% to $160 a share. Among the neutral names, CVX by Chevron
the target was raised 16% to $180, XOM by Exxon
was increased by 12% to $110, Shell UK:SHEL

was boosted by 9% to 2360 pence and IT:ENI by Eni
was raised by 16% a 14. Repsol goals have been increased by 3% to €17..

Note that Citi economists see the global economy continuing to lose momentum with the US entering a recession by Q3 2023 and Europe already there. The OECD also released its forecasts and, not surprisingly, they were bleak.

And they have caveats for investors to consider when dealing with this dazzling sector. They say the relative performance of energy stocks, while still positive, will start to decline as the stocks have such a big run-up in 2022. Also, don’t be greedy or “hold on too long,” said Syme and team, who said warned that when the collapse in demand really starts to bite, the performance of the sector will start to suffer.

The markets

Market Watch

ES00 stock futures


are tilting slightly higher as bond yields fall and the dollar DXY
pull back. Oil prices CL

they are slightly higher after Monday’s tumultuous session. Gold GC00
and silver SI00
prices are firmer and bitcoin BTCUSD
it’s slightly higher at $15,776.

The buzz

Saudi Arabia pulled off their first upset of the World Cup, beating Argentina 2-1.

DLTR dollar tree
shares fell after the retailer beat forecasts but provided pessimistic guidance. Dell DELL
is down after the PC maker’s weak forecast overshadowed a beat of earnings. ZoomZM
it also delivered optimistic results, but shares are trading lower on disappointing indications. HP HPQ
will report after closing.

Baidu shares BIDU
they’re on the rise after the Chinese internet giant reported higher-than-expected revenue.

Lordstown Motors RIDE
and Nikola NKLA
they’re among several stocks that Goldman warns are burning through cash and may need to raise capital soon. The bank also points out that Microsoft has now overtaken Amazon as the stock with the longest hedge fund positions.

Days after Chinese President Xi Jinping talks about wealth redistribution, HK:9618

JD extension
it said it would cut executive salaries by 10% to 15% to increase benefits for lower-level employees.

A speech by Kansas City Fed Chair Esther George is the only economic item of note for Tuesday.

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