* World oil sector down 8.6 percent this year
* Crude slumped in October from peak of $85
* Investors remain cautious about volatile oil stocks
* Crude price volatility poses challenge to oil majors too
* GRAPHIC: Gap between stocks and crude closes https://tmsnrt.rs/2QxTH5T
By Helen Reid and Ron Bousso
LONDON, Nov 23 (Reuters) - The latest collapse in oil priceshas proved some investors right in their lack of confidence inenergy stocks this year.Crude prices surged to a four-year high early in 2018 astensions with Iran and OPEC supply cuts raised concerns thatglobal oil supply was dwindling.
But the narrative has flipped since October as worries overa global trade war and rising U.S. shale oil production mounted,driving oil to a one-year low on Friday. Brent crude is down to$60 a barrel from a peak of $85 in early October.
While oil majors have gone some way to cleaning up theirbalance sheets since the 2014 oil price collapse, their sharesare still sensitive to moves in the underlying commodity -higher crude spells stronger revenues.
When prices were climbing earlier this year, big banks wererecommending investors buy back into the sector. Many,especially in Europe, followed that advice.
But given the latest falls, some of those who sat on thesidelines believe their caution has been rewarded.
Kevin Gardiner, global investment strategist at Rothschild &Co Wealth Management, said he was happy not to have piled intothe bullish oil trade, having considered it earlier in the year.
"Just as the ink was drying on the bullish stories on theoil price, we turned around and a sector that was lookingintriguing is now looking much less so, at short notice," saidGardiner."You have to be really careful with commodities, because it'sa market timing story," he added.
Investing in European oil stocks at the start of this yearwould have been very lucrative - if you had had the foresight tosell at the October peak.
That would have delivered a solid 15 percent return, not tobe sniffed at in a building global bear market.
In Europe the energy sector is still thestrongest-performing this year, up 2.2 percent by Nov. 22 whenall other sectors apart from healthcare are in the red.
The main decision facing investors is whether they canstomach the volatility of the sector.
"The collapse in the last month has really scaredinstitutions," said Ashley Kelty, oil and gas analyst at CantorFitzgerald.
"Investors recognise that the stocks are still fundamentallyOK, but trying to ascertain a long-term value is very difficult,so a lot of people are going to be sitting on their hands untilthe oil price stabilises."
Bank of America Merrill Lynch's November fund manager surveyshowed investors slashed allocations to energy stocks by sevenpercentage points from the previous month, while European fundmanagers also cut their positions.
ETFs tracking energy indices have seen big outflows, takingtheir assets under management back to April levels.
Energy stocks had already significantly lagged gains in oillast year, as investors remained cautious about runaway crudeprices which they judged could easily come crashing back down.
"When the oil price did come back most long-terminstitutions recognised that they were very underweight in oil,but were quite happy to give up the first 20 to 25 percent ofthe rise before they came back in, mainly because they were verywary that oil could rebound downwards very quickly," Kelty said.
While many at the start of this year predicted the gap wouldclose from the bottom as oil stocks caught up with gains in thecrude price, the latest data shows that gap is closing from thetop, with crude crumbling, proving bears right.
Energy stocks are better positioned to withstand lower oilprices than they have been in the past.
The world's top oil companies, including Exxon Mobil, Royal Dutch Shell and BP, are todayable to generate profit at oil prices of around $50 a barrel,and have vowed to remain disciplined in spending even as theoutlook for oil prices looked stronger.
"The cashflow improvements coming from the energy sectorgenerally are still quite good," said Caroline Simmons, thedeputy head of UBS Wealth Management's UK investment office.
But oil price volatility poses a problem not just forinvestors but also for the companies themselves, she added.
"What they want is stability in the oil price to be able tomake decisions about future investment. It doesn't even matterabout the level, they just need stability," she said.
BP is planning its long-term investments based on an averageoil price of $50 to $65 a barrel, its Chief Executive Bob Dudleysaid in October.
Alastair Bishop, director and portfolio manager inBlackRock's natural resources team, which has major holdings inthe world's five largest oil and gas companies, said he did notexpect capital expenditure to rise in the near term.
(Reporting by Helen Reid and Ron Bousso; Editing by Jan Harvey)
