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Key Takeaways
- Last week, oil prices were down as American price caps on Russian oil were weaker than originally intended. In theory, this meant a more steady supply of oil and a lower likelihood of price spikes.
- This week, a confluence of factors – including the closure of the Keystone pipeline and an expected increase in economic activity in China – pushed stock prices back on an upward trend.
- Energy stock prices are almost always dependent on oil prices, which are highly variable. It’s not unusual to see such swings, but they should be considered while managing your long-term portfolio.
On Dec. 5, 2023, major energy stocks like Exxon Mobil, Haliburton, and Shell entered a week-long tumble. They went from $109.86 to $103.54 (XOM), $38.87 to $33.01 (HAL), and $57.72 to $55.61 (SHEL) respectively.
These stocks have each made a partial recovery, at least. XOM is sitting at $108.68, HAL is trading for $39.09, and SHEL is $57.78.
But what caused the downward turn in the first place? It turns out it was a confluence of factors, including geopolitical conflicts, scientific advances, and something known as the rocket-and-feather theory.
What is the rocket-and-feather theory?
Energy stocks – especially the likes of XOM, HAL, and SHEL – are inherently tied in part to the price of oil. At the beginning of 2022, we saw price spikes that contributed to higher stock prices throughout the year.
Once the price of oil spikes, it tends to follow something called rocket-and-feather theory. That means when we see oil price spikes, they tend to happen very quickly, shooting up like a rocket. Eventually they come back down, but it takes quite some time for them to return to the original pricing – or even get close. The downward action resembles a feather drifting back to earth.
In January 2022, oil was selling for $76.08 per barrel. It peaked in March at $123.70 per barrel, and has slowly been falling over the 9 months since, sitting at $77.28 as of Dec. 14, 2022.
The rocket-and-feather theory didn’t cause the drop in energy stocks last week in and of itself. But this pricing trend did affect the consequences of some geopolitical policies.
Price caps on Russian oil are theoretically a moot point
The United States and its allies announced the final details of the price cap they were imposing on Russian oil as a result of the nation’s invasion of Ukraine. These final details were released in the days leading up to December 5 and 6.
Initially, there was speculation that the price cap would hurt global oil supply, thus driving up prices. But thanks to prices falling at a feather-like pace, by December, Russian oil was already trading pretty close to the cap.
On top of this, the U.S. Treasury also announced in late November that its enforcement of the caps – which were set at $60 per barrel – would be relatively relaxed. This was a softening compared to the rhetoric used regarding the policies in October.
Nuclear Fusion
On Dec. 5, 2022, scientists at the National Ignition Facility (NIF) in California potentially changed the course of history by achieving a net energy gain through nuclear fusion.
However, to claim that this discovery was the primary reason for energy markets stumbling would be an overreach. Cost per barrel and international policy surrounding oil pricing caps were the primary reasons for the down week.
But this breakthrough did highlight the shifting investments we see as the green energy sector grows. Currently, wind, solar, and hydrogen technology companies are experiencing economic growth with shifting environmental policies across the globe.
These policies are forcing oil and gas giants to make big moves outside the stock market, too. In 2021, Shell lost a major environmental case in The Hague, prompting the Dutch company to relocate its headquarters to London.
Given enough time and funding, nuclear fusion could change the future of energy even further. An energy source with more output than input could – at some date extremely far into the future – remove the need for oil and gas altogether.
But the Dec. 5, 2022 achievement alone doesn’t permanently change the markets. Not yet.
Why did energy stocks start climbing again this week?
The following events contributed to an upward trend of energy stock prices this week – though they haven’t quite recovered from last week’s falls:
- Protests and subsequent coronavirus policy changes in China
- Good news on American inflation numbers
- Russian reactions to price caps
- Keystone Pipeline closure
Chinese protests and economic outlook
Over the past several weeks, Chinese protests over governmental COVID-19 policies have affected all kinds of markets, from copper to natural gas. The protestors are demanding a further opening of Chinese society, and there are indicators that the government may listen.
A more open Chinese society would likely mean an increase of production of all kinds of goods in Chinese factories. This increased production would mean increased demand for oil and natural gas in China, thus putting a strain on the global supply and demand equation.
CPI report reveals fall in annual inflation
Early this week, the Consumer Price Index (CPI) report revealed an increase in inflation of just 0.1% month-over-month. That brought the year-over-year inflation rate down from 7.7% to 7.1%.
Energy prices have played a huge part in high inflation rates, so it might be surprising to hear that lower inflation numbers are good for oil and gas companies. But lower inflation is an indication to the markets that consumers have more discretionary income.
Consumers with more discretionary income tend to spend more on travel, whether they’re a little more reckless about consolidated errand runs, or opt to take a road trip instead of a staycation. All of that is good news for energy companies, as it could increase demand for their product.
Russia isn’t happy about price caps
The price caps on Russian oil may seem weaker than they were initially intended to be due to circumstances in the current market. But the Russian government still isn’t happy about them. On Firday, Dec. 9, 2022, Putin threatened to cut oil production in reaction to the policies. If he followed through, that would mean a further supply shortage just as demand is increasing in other parts of the world.
This additional change in the supply/demand equation likely contributed to the market’s partial rebound on Monday, Dec. 12, 2022. If the price of oil is expected to go up, that’s going to be good for the energy sector’s profits.
Keystone Pipeline closure
The Keystone Pipeline runs between Canada and the U.S. On Dec. 7, 2022, it was discovered to be leaking 14,000 barrels of crude oil (the current total is now over 588,000 gallons). It was subsequently closed, and as the days rolled on it became clear that it wouldn’t be opening again anytime soon.
This is the largest leak in the pipeline’s history, and it’s expected to take “several weeks” for the pipeline to be operational again, with no explicit end date for repairs on the calendar. This will contribute to short-term contractions in global oil supply, which means the price per barrel could go up.
Bottom line
Energy stocks are tightly tied to the price of oil. Because oil prices are always oscillating, stock values are too. Investing based on short-term outlooks in this sector of the market in particular can be a risky game.
Having energy stocks in a portfolio with a long time horizon is a much safer bet. Q.ai’s balanced Investment Kits include energy stocks along with other diversified investments, allocating your assets using the power of artificial intelligence. If you want to invest in the clean energy sector instead, see our Clean Tech Investment Kit for a straightforward and strategically diversified option.
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Source: https://www.forbes.com/sites/qai/2022/12/25/why-energy-stocks-are-moving-up-after-the-most-recent-slump/