Oil prices have erased all the gains made during 2022, but by the look of things, energy investors don’t seem to really care.
This week the price of West Texas Intermediate, the U.S. crude benchmark, fell into the red for the year and is down roughly 40 per cent from its 52-week high in March of more than US$120 a barrel, when Russia’s invasion of Ukraine sparked a global energy crisis.
Meanwhile, energy-stock indexes might have given up some of their gains, but are down just 16 per cent from their peak in the case of Canada’s energy index, and down 9 per cent for global and U.S. energy stocks.
The disconnect between oil and oil stocks reflects two big, contrasting bets facing commodities and the economy.
Oil prices, like other commodities, are being hammered by fears that rising interest rates are causing a slowdown in global economic growth, which would further crimp demand for fuel.
On the other hand, energy investors see value in oil and gas stocks. It helps that energy stocks are relatively cheap based on their forward price-to-earnings ratio, and companies are pumping out dividends to shareholders.
But more than that, investors believe tight supplies will more than make up for weaker demand and send oil prices soaring again. For instance, U.S. oil inventories are at their lowest level since 2000, after accounting for drawdowns from America’s strategic petroleum reserve to fight high gasoline prices.
Energy stocks tend to track oil prices over the long run, leaving the question of which of those bets will be proved right.
Jason Kirby