Why Investors Like Warren Buffett Are Still Buying Energy Stocks Despite The Highest Prices In Years

Oil prices have soared in the last month, as any drivers filling their gas tanks can attest, and investors in Western oil and gas companies have been reaping the rewards. Whether energy stocks continue to outperform depends largely on how long sanctions against Russia will last, but energy fund managers, investment strategists and even Warren Buffett are still optimistic.

The S&P’s energy sector was its top performer in 2021 with a 53% gain, rebounding from a crushing 2020, and it’s up another 32% this year, significantly outperforming the broader market’s 7.4% decline. Occidental Petroleum’s stock has doubled in 2022, and the largest U.S. energy giants like Exxon Mobil, Chevron and ConocoPhillips have gained upwards of 30%.

Buffett still sees enough upside that Berkshire Hathaway has bought 136.4 million shares of Occidental worth $7.9 billion since February 28, building a 14.6% stake in the company. Berkshire shares have risen to record highs in March, making Buffett the fifth-richest person in the world with an estimated $125 billion fortune.

The sector has been inversely correlated with the rest of the market while the war in Ukraine dominates the macroeconomic landscape–sanctions that are good for oil producers are detrimental to the rest of the economy. Crude oil prices settled at 14-year highs at $123.70 per barrel on March 8 after the U.S. and U.K. both banned oil imports, though prices have since declined to around $100 after a spike in Covid infections ushered in more lockdowns in China and peace talks reportedly progressed between Russia and Ukraine.

“Given how much is riding on whether or not the Ukraine conflict gets resolved, when you’re buying an oil-producing company, you’re just making a bet on the ultimate resolution or lack thereof of this conflict more than anything in the short term,” says Matt Niblack, co-CIO of $700 million energy hedge fund HITE Hedge Asset Management.

But even if Ukraine and Russia negotiate a settlement to end the fighting soon, Niblack and other experts still see tailwinds that could bolster the stocks of oil and gas producers. The European Union, which relied on Russia for 45% of its gas imports and about 25% of its crude oil purchases in 2021, pledged last week to cut imports of Russian oil and gas by two-thirds this year and cease all imports by the end of the decade.

The EU intends to accomplish that in part by accelerating its transition to renewable energy sources, but solar panels and windmills can’t come close to replacing the 155 billion cubic meters of natural gas it bought from Russia last year. The European Commission estimated that the EU can import an additional 50 billion cubic meters of liquefied natural gas annually from countries like the U.S., Norway and Qatar, creating a new source of demand for oil and gas producers. S&P Global forecasts that OPEC’s spare production capacity for crude oil is “likely limited” and that all OPEC members except Saudi Arabia could be maxed out of additional production by May.

“I think investors wrongly saw these companies as part of an industry without a future, companies that lacked a terminal value,” says Sean Fieler, chief investment officer of $700 million hedge fund Equinox Partners. “There was a lot of ESG-driven pessimism about the sector that just doesn’t conform with the underlying supply and demand fundamentals.”

Although it has doubled since the fall of 2020, the S&P energy sector still lags far behind its 2014 levels from the last time oil crossed $100 per barrel. Fieler believes oil and gas stocks are still generally undervalued, pointing to pessimistic crude oil futures prices for December 2026 that remain at less than $70 per barrel despite projections that global oil and gas demand will increase in the next five years.

“For the overwhelming majority of investors, the best practice is to stay the course and not try to be whipsawed by headlines, but it does make sense to think about the medium-term impacts,” says Yung-Yu Ma, chief investment strategist of BMO Wealth Management. “We think one of those impacts is going to be additional spending on the domestic front, both in Europe and in the U.S., that benefits those nuts and bolts of the economy.”