During this year 2022 the investing in energy stocks has benefited from the rise in prices in the energy sector. If you are a homeowner and you expect energy prices to drop, we have bad news for you... But if you believe that investing in energy stocks will begin to balance their prices, we give you a couple of keys to address the situation...
Let's recap...
- LInvestment in energy stocks has grown significantly. The price of oil hit $120 a barrel for the second time in a couple of months on Monday.
- That has provided a windfall for investing in energy stocks, specifically energy companies. That's why such companies are distributing that cash to shareholders through dividends and share buybacks.
- But these higher energy prices are complicating central banks' efforts to control sky-high inflation.
✍️ Connecting the dots
Investing in energy stocks like oil was becoming increasingly expensive even before the Russian invasion of Ukraine. Recovering economies were crying out for the limited supply that exists. But these supply problems got much worse after many countries implemented full or partial bans on Russian oil. That caused prices to shoot up to a high of 14 years in March. Oil isn't the only energy stock investment that has soared. The same supply and demand dynamics have also skyrocketed natural gas prices.
Comparison of oil (black) and natural gas (blue) performance. Source: Yahoo Finance
Now, one would think that energy stock investment prices would balance out soon, but the worst may be yet to come. Investment demand in energy stocks such as oil and natural gas is expected to continue growing in the coming months. Driving and air conditioning tend to peak in the summer in the northern hemisphere. This increases the demand for electricity generated by gasoline and natural gas, respectively. To add fuel to the fire, scientists are already payments that 2022 will be one of the 10 hottest years on record, and summer temperatures are expected to be much higher than normal. The problem is that energy supplies are so limited that there won't be enough for everyone, meaning many countries will experience power outages. A heat wave recent in Asia, for example, caused daily multi-hour blackouts affecting more than a billion people in Pakistan, Myanmar, Sri Lanka and India.
Maximum temperatures recorded in Asian areas. Source: Meteored
Points to watch in energy stock investing this week
1. Central banks can't rest
The combination of a supply-demand imbalance in energy stock investing and extreme weather could cause another big jump in energy prices, which in turn could complicate central banks' efforts to control the inflation. Right now, major central banks are aggressively raising interest rates in an effort to reduce demand, which in turn should slow the price rise in investing in energy stocks. These increases work well if inflation is caused by excessive demand, but they won't do much to address what is called "cost-driven inflation," when overall prices rise because the cost of wages and raw materials increases. That's exactly what we're seeing here.
History of development in the U.S. of inflation. Source: The New York Times
2. Big Oil Loves It⛽
The oil giants aren't complaining, and neither are those who have made an investment in energy stocks like oil: Higher energy prices have led to higher profits, and that cash is funneled back to investors in the form of dividends. and share buybacks. BP (BP) boosted its share buyback program by $2.500 billion last month, days after TotalEnergies (T) committed to buy back $2.000 billion of its own shares by July. Not wanting to be left behind, Exxon Mobil (XOM) tripled its own program to a whopping $30 billion. Governments are not impressed: They are pressuring energy companies to pour money into oil production as consumers feel the effects of rising prices at the pump.
Investment in energy stocks has benefited during 2022. Source: Bloomberg
Also in our sights
Retailers are already seeing their profit margins eroded by inflation, but the sector suddenly faces another challenge: selling all the products they have stockpiled. According to Bloomberg, retailers like Walmart (WMT) and Target (TGT) saw their inventories grow to $45 billion last quarter, a 26% more than a year ago. This could be useful if supply chains deteriorate again, but changing tastes and consumer belt-tightening could leave retailers with a glut of merchandise that people simply don't want.