Energy prices have been soaring throughout 2022 and many are wondering how long it can continue for. Tune in this week as we dive into the energy market and where we think it might be heading:
Why Has Energy Been So Strong?
While the bulk of the market has moved lower this year, energy stocks have been defiant and continued to move higher for months. Energy is typically demand inelastic, meaning that regardless of price the demand always remains fairly steady. Host Andrew Baxter notes that when you layer in some issues on the supply side, you have a textbook formula for prices moving higher. The conflict in Ukraine has caused shortages in some part has led to some shortages and this is one of the main reasons for oil prices in particular remaining so high. If you opened up your trading screen right now and had a look at any of the major energy stocks in the market, you’d see what is effectively a bottom left to top right trend.
The notion that a stock having already moved higher means it can’t continue to do so is a common psychological roadblock, and Andrew Baxter notes that you can buy low and sell higher, but you can also buy high and sell higher. The bottom line is you can still make money and should your view remain bullish this mentality is not valid.
What Could Push Prices Higher?
Europe is hugely reliant on Russia for its natural gas and oil. With very little Russian gas making its way into Europe for the winter, there are concerns. The European winter brings with it an increase in demand for heating and if the supply remains low, prices should continue to soar. Host Andrew Baxter notes that storing it is a major issue, considering Germany in particular. They are currently working away to collect and store as much as they can ahead of winter. The Nordstream pipelines from Russia to Germany are currently inactive. So as Germany scrambles to get its ducks in a row ahead of winter, very little is being done in remedying the currently decommissioned pipelines. Right now, it does not seem likely that the Germans will be able to meet demand throughout winter if things don’t change quickly.
The Role of Oil
The US is also a major consumer of oil and shortages and although they are not directly affected by the shortages in Europe, the lack of supply on a global scale pushes prices up. The US maintains oil reserves for potential supply shortages and has had to heavily draw from them in recent months. Host Andrew Baxter notes that the reserves are currently at their lowest level since 1983, another cause for concern. The Biden administration have now opted to release another large chunk of their reserves to try to keep energy prices down while they continue to tackle inflation.
Despite the steady release of oil from reserves, Saudi Arabia – a large producer of oil, quickly met these announcements by cutting supply to keep prices nice and high. It will eventually come to a point where the US can’t continue to release oil from their reserves and it all has to come to a head eventually. Another topic of interest is the refining capacity of the US. Currently, the US has very low overall capacity for refining oil which simply can not keep up with demand. Even running at capacity, you typically find yourself with issues like machinery malfunction which only exacerbates the issue. There are not even any applications for new refineries. The current climate in which investors are looking for greener options, it appears to be a fairly raw deal for any companies looking to open up a new refinery.
OPEC is effectively a collection of countries responsible for oil production in the world. Host Andrew Baxter notes they operate quite a bit like a cartel – dictating the supply and thus controlling prices. Typically demand is a more important factor for commodities as supply is not governed by a team of countries with a vested interest. As OPEC continues to decrease the supply to the world, we find that prices continue to increase. Strained relationships between members of OPEC such as the US and Saudi Arabia can lead to some exploitation when the opportunity presents itself.
How to Get Exposure
There are plenty of avenues you can take to give yourself a chance to benefit from potentially higher energy prices. A few names that come to mind for Andrew – Conoco Phillips, Exxon Mobil, British Petroleum, or any of the plethora of options scattered throughout the global markets. If you are more interested in ETFs on the US – you can look at XLE which is an energy sector ETF or USO which is a US oil fund exposure. Keep in mind USO tracks lower in the long-term due to upkeep costs. Importantly, always keep in mind the risk associated with energy prices as a sudden change in demand can be very costly.