Energy traders take advantage of fluctuations in the price of a certain specialised set of
commodities markets such as oil, gas, gasoline and heating oil. Energy commodities
are some of the most important markets in the world because they set the price for our
everyday consumption of the fuel required to live what we now consider to be our
normal lives.
Energy stocks have been the number one sector in the market so far in 2022, and this follows upon its number one performance in 2021. What should we make of that and what does it portend for the future? We should probably start with the fact that energy was the worst performing sector in 2020. There are two ways of looking at this. It would be easy for investors to decide that the 2021-2022 performance by energy stocks is simply part of a huge catchup rally that may now have overshot the mark. Energy stocks had fallen to a point where they were dirt cheap, according to this view, and have since recovered to a point where they are fully priced. The other point of view is that something fundamental has changed in the energy market and the rally starting in the middle of 2020 was just the beginning as the market gradually recognized the implications of that change. Deciding which way to look at the two year monster rally is the key to understanding whether energy is still a good buy right now.
The relationship between energy stocks and highly volatile oil prices is less important than it has been over the past decade. Most oil and gas companies have taken advantage of the high prices over the first half of 2022 to repair their balance sheets and reduce financial leverage. This is true of all the stocks mentioned in this article. All can operate profitably and provide solid future shareholder returns at prices around the average price for 2021 which was about $68 per barrel. This is probably in the low end of the band upon which oil companies base their forward expectations. Prices bouncing around $90 per barrel probably don't worry energy company CEOs to nearly the degree that short term volatility seems to worry investors and the market. The underlying assumptions for companies mentioned in this article are roughly based on 2021 oil prices and level of volatility.
