The XLE ETF, which tracks traditional energy stocks, has jumped 66 percent since the beginning of the year, reflecting the surge in energy company stock prices and particularly high oil and gas prices. Despite some decline in recent weeks, oil prices have barely dropped from $ 110 a barrel of WTI. For comparison, during the Corona period, prices ranged from $ 50 to $ 70 per barrel.
But never resilience. According to Jack Stein, co-founder and chief investment officer at consulting firm Carbon Collective there are at least three reasons to hurry up and realize profits in the sector and look for other investments.
First, it points to the impending recession that many believe will cause a decline in energy demand. He points to the fact that in previous recessions there has been a sudden drop in oil prices. This is what happened in the technology bubble in 2000 as well as in the recession of 2008 as well as during the corona in 2020. In all these cases the recession was accompanied by a sharp drop in oil prices, and so, in his opinion, will happen this time as well.
The second factor in his opinion is the phenomenon called “demand crash”. In a situation where the price of a particular product rises sharply. This causes consumers to look for alternatives and at the same time producers to invest to increase production capacity, and when both processes mature there is suddenly an excess supply versus a drop in demand which causes a sharp drop in price.
This may also be the case for oil and gas prices. Because the price is so high consumers are looking for alternatives. For example, the price of fuel broke historical records, so people travel less, use more public transportation, avoid flights, and so on. Demand for fuel over the past four weeks has dropped to 9.106 million barrels per day compared to 9.116 years earlier. Keep in mind that last year the corona was still much more significant, and yet the demand for fuel was higher. People are simply refraining from using the car more and more. Fuel prices in the United States now average $ 4.88 per gallon, up from $ 3,099 a year ago. Market forces are forcing consumers to stay away from the gas pedal.
At the same time there are new investments in energy generation, traditional or renewable, contracts are signed and factories are set up to increase production, and to cover the loss of supply from Russia and Ukraine. When this process matures along with the alternatives, it is very possible that this will lead to a sharp drop in the price of various energy products from fuel to crude oil.
The third factor that Stein points out that joins the previous factor is the electrification. The world is moving to electric vehicles and the sector is growing at a record pace. 6.6 million electric vehicles were sold in 2021 and every vehicle produced immediately was hijacked. According to a survey conducted, 52% of customers who plan to buy a new car in the next two years want to buy an electric or hybrid car.
The massive global transition to electric vehicles along with the construction of alternative energy sources to electricity sources, and given the savings in the use of electricity versus fuel will ultimately lower the demand for oil and join the collapse of demand we talked about earlier.
Shares of oil companies have benefited from a one-off scenario that has suddenly boosted demand for the product they sell to historic levels. The market responded enthusiastically and bounced the stock. But sometimes you also have to know how to get out on time, and to know Stein, this is the time.
At the same time we will mention that there are observers that the high oil prices will accompany us for years to come. One of them is probably Warren Buffett who is consistently increasing his holdings in the energy company
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And has already reached 16%. The latest purchase was made last week and indicates that in the opinion of the veteran guru for oil shares there is still room to climb.
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