Energy stocks have been the star investment this year. Now is the time to sell them and electrify your portfolio before investors return to focus on the long-term headwinds in the sector.
There are a number of headwinds that could threaten the rise: the rising risk of recession, the reaction of consumers to the high price of gasoline and the push to electrify our economy.
The stock market is starting to realize this.
The Energy Select Sector SPDR ETF XLE,
increased 66% from the beginning of the year to the close of the year on June 8, as the Russian invasion of Ukraine in February, combined with increased demand for recovery of the world economy of COVID-19, brought oil prices to unimaginable heights.
West Texas Intermediate CL.1,
the U.S. benchmark for oil prices, hit a 52-week high of $ 123.70 on March 8 and continues to trade above $ 110. In comparison, during the four years leading up to the 2020 COVID pandemic, oil prices generally traded between $ 50 and $ 70 a barrel.
Since June 8, however, the ETF has suffered 20%, the traditional marker of a bear market.
Here are three reasons to block your benefits now:
The risk of recession increases
The Federal Reserve is raising interest rates and lowering its balance sheet in an effort to control inflation, which is being driven in large part by rising energy prices.
The result can be a recession. And that’s not good for oil prices, which have historically been quite sensitive to economic recessions, or the shares of energy companies, whose profit margins tend to rise along with oil prices.
All the recent economic recessions coincided with a significant and sudden drop in the price of crude oil, including the 2000 technology bubble, the September 11 attacks, the 2008 Great Recession, and the 2020 pandemic.
Oil prices have cooled in recent weeks, and this trend could intensify given this risk of recession. Some investors, including ARK Invest CEO Cathie Wood, and stock market strategists believe we are already in recession.
With oil prices so high, there are signs of consumer reaction, which translates into the destruction of oil demand. This is bad for the profits of oil companies.
Four-week average gasoline demand has fallen to 9.016 million barrels a day on June 10, 2022, according to the U.S. Energy Information Administration, from 9.116 million barrels a day a year ago .
The national average for a gallon of gasoline is $ 4.88 a gallon, compared to $ 3,099 a year ago, according to AAA.
Market forces are working. Yes, there is a limit to how much consumers will pay for gasoline.
Electrification of our economy
It’s no secret that electric vehicles are at the heart of our global energy transition. Still, this is fueling concerns about maximum oil demand and, more alarming to investors, maximum oil profits.
Consumers are increasingly putting their money where their mouths are by buying electric vehicles. Global electric vehicle sales reached a record 6.6 million vehicles in 2021, according to the International Energy Agency. And 52% of consumers who plan to buy a car in the next two years intend to buy an electric or hybrid vehicle, according to an EY study published in May.
Switching to an electric vehicle permanently reduces the demand for oil. Lower demand means less oil sold. This means less profit for oil stocks. Period.
While this is not news, it is important to recognize the unique moment that stocks now face: a confluence of potentially unique events in life in which the stock market is taking a break from long-term headwinds. of the energy sector and, instead, focuses. on short-term upward catalysts. This has resulted, unsurprisingly, in high stock prices for the energy sector, prices we may never see again.
Take Exxon Mobil XOM,
Shares closed at a record $ 105.57 on June 8, eclipsing the previous peak in stocks in May 2014. Even with Exxon Mobil falling 15% since this new record, shares continue to rise around 46% to date.
Now is a prudent time for investors to sell their oil and energy stocks before the geopolitical and COVID-driven oil price rebound fades.
There’s an old adage on Wall Street that suggests you won’t do any harm by taking profits.
Electrifying your portfolio
In our view, investors should completely avoid companies that rely on fossil fuels and create diversified portfolios that incorporate electrification such as solar panels, wind power, electric vehicles and batteries, which are escalating exponentially.
But beware: some companies that look “green” still have revenues tied to the fossil fuel industry. Instead, consider the shares and funds they have no revenue streams that serve the fossil fuel industry.
Although family names like Tesla TSLA,
and Nio NIO,
fit this criterion, there are many underlined names like ABB ABB,
WESCO International WCC,
and IDEX Ideanomics,
which play an important role in the development and maintenance of the power grid infrastructure.
Zach Stein is the co-founder and investment director of Carbon Collective, a climate-focused investment advisory firm.