The latest Bank of America Global Fund Managers Survey reveals that fund managers are showing less interest in energy stocks than they have in years, a trend that has been exacerbated by the recent decline in oil prices. Both factors contribute to a negative sentiment surrounding the energy sector and provide few reasons for investors to consider buying energy stocks.

The situation worsened on Monday when Saudi Arabia reduced its selling price for oil, causing Brent crude to drop by 3.9% to $75.73 a barrel. Natural gas prices also took a hit, falling by 4.4% to $2.77 per million British thermal units. As a result, the Energy Select Sector SPDR Fund (XLE) experienced a 3% decline, while Exxon Mobil (XOM) and Chevron (CVX) saw drops of 2.8% and 1.7%, respectively.

This downward trend is evident in fund managers' decreasing exposure to energy stocks. In December, their exposure dropped by 11% compared to November, marking the largest month-to-month decline since January 2016. In contrast, their exposure to tech stocks remained strong, with 23% more exposure than their benchmarks.

However, it is worth noting that being out of favor does not always spell doom for stocks. In fact, those who invested in energy stocks back in December 2020, during the previous period of unpopularity, reaped significant gains. The Energy SPDR Fund, for instance, rose by an impressive 53% from December 2020 to December 2021. Similarly, during the previous trough in sentiment in September 2015, the fund saw a 10% increase over the following year.

Despite this positive history, some analysts believe that fund managers are making a mistake by allocating so little money to energy stocks. Roth MKM analyst Leo Mariani argues that their bearish stance is unfounded, as he expects a rebound in oil demand. Mariani predicts that Brent crude will average $85 a barrel by 2024.

In light of these projections, Mariani suggests that fund managers may be missing out on potential gains by underestimating the upside potential of oil-weighted energy equities. He emphasizes that now may be an opportune time to maintain or even increase exposure to the energy sector.

While energy stocks currently face challenges and negative sentiment, history has shown that buying when stocks are out of favor can lead to favorable returns. As the energy sector grapples with these headwinds, investors should carefully consider their portfolio allocations and assess the potential opportunities that this market presents.

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