By Avi Salzman

Energy stocks are in a slump, and the outlook for 2025 is looking dim. Some of the problems may be short-term, but others look like structural issues that could linger. The biggest structural problem is that demand in China, the world's largest importer of oil, is no longer growing.

The Energy Select Sector SPDR Fund is down 3.5% over the past two days, and has been in an extended slump since a brief uptick after the election. It's now in negative territory since the election, and is nearing its three-month low.

Exxon Mobil, the king of U.S. energy stocks, has fallen eight days in a row, its worst streak since 2022. The downturn hasn't been steep -- the stock is off about 6% since it started, and Exxon is still up about 7% this year. But it does show that sentiment has soured.

There are several factors behind the slump. Oil prices have dipped in recent days, as Israel and Hamas appear to be close to a cease-fire, removing some of the market's geopolitical premium. West Texas Intermediate crude, the U.S. benchmark, fell 1% to $70 per barrel on Wednesday, after also dropping on Monday.

In addition, energy may have gotten caught up in a larger shift in the market. In general, investors have been turning away from stocks with low-valuations -- which includes energy -- to bet more on big tech names. The iShares S&P 500 Value ETF has fallen every day for more than two weeks, the longest stretch on record.

But China may pose the biggest challenge. The latest data out of China showed that oil demand fell 2.1% in November on a year-over-year basis. The International Energy Agency expects Chinese oil demand to grow by just 140,000 barrels a day in 2024 and 220,000 in 2025, versus 1.4 million in 2023.

"China has historically been the global demand engine," wrote Robert Yawger, director of energy futures, Mizuho Securities USA. "However, the rate of demand growth has slowed dramatically in the past year as the economy has slowed and EV sales have increased."

Electric vehicles and plug-in hybrids account for more than half of China's auto sales in recent months, which has been eating into gasoline sales. S&P Global Commodity Insights projects that gasoline and diesel demand have already peaked in China.

Demand could still rise in China next year, if the government decides to stimulate the economy to boost industrial growth. Compared with the U.S., China uses a higher proportion of its oil for industrial projects. But the drop in gasoline use is a warning sign. Investors should be wary heading into 2025.

Write to Avi Salzman at avi.salzman@barrons.com

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December 17, 2024 15:42 ET (20:42 GMT)

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