“The report of my death was an exaggeration” (Mark Twain). This famous quote could have been referenced to crude oil, as many predicted its demise in the year 2020. Now that the last three years are behind us, I believe we can say that 2022 was the year of oil.
The price recovery of oil barrels and stock price of energy companies headquartered in the United States were astonishing. Just two years prior, we were living through a global pandemic, as economies shut down and stalled. Demand for oil and petroleum products dropped sharply, resulting in historically low prices. On April 20, 2020, West Texas Intermediate Crude Oil (WTI) settled at negative $37.63 on the New York Mercantile Exchange. According to market sources, this was the first and only time an oil contract closed with a negative value. Over the next 12 months, economies restarted, our lives resumed with some normalcy and consumers started spending again. As you can see from the numbers, prices recovered dramatically off the lows in 2020 (See figure below).
Last weekend, there was a commercial playing during the NFL playoffs. During the one-minute ad, we see how a couple is preparing to meet each other for their first date. All seems to be going quite well, until the entire timeline is replayed, without any product produced with petroleum. Their cell phones are removed. His glasses and hair gel are removed. Her contact lenses, lipstick, and hair highlights, the tires on the Uber she rides in are removed. The producer of the ad drives this point home: our modern life runs on energy.
Moving from a simple advertisement emphasizing the importance of oil, we look to a large-scale example of oil’s significance in what the state of Wyoming is proposing. Wyoming State senator, Jim Anderson, designed a bill to phase out the sale of electric vehicles in Wyoming by the year 2035. Wyoming’s vast stretches of highways lack electric vehicle charging stations and render electric vehicles impractical. Also, the oil industry has employed an estimated twenty-thousand people residing in Wyoming. Electric vehicles will directly impact the population and economy of the state of Wyoming. The bill will safeguard oil and gas industries for the foreseeable future. Meanwhile, more than a dozen states are requiring rules for electric vehicles by 2035, with the strictest rules coming from California. This proposed legislation is important to keep an eye on, especially since this will have an impact on investors in the coming years.
As of today, WTI crude is currently sitting at $81.12 with stocks continuing to move higher as inflation slows and the economy remains robust, as shown by this morning’s Gross Domestic Product (GDP) report. Meanwhile, for the week, the S&P 500, Dow Jones Industrial Average, and NASDAQ were all up 4.16%, 2.74%, and 6.08%, respectively, as of today’s close. It has been a decent start to earnings season. While some companies have reported strong earnings and outlooks, others have not performed as well, but not to the extent that investors had predicted. The Federal Reserve’s inflation indicator, the Personal Consumption Expenditure (PCE) report, also showed signs of slowing inflation ahead of next week’s FOMC policy meeting. It is expected that the Fed will raise interest rates by 25 basis points and continue to monitor the economic data, as previously stated in previous meetings.
What is the investment takeaway specific to the energy sector? Know what you own. No matter how dire the price of oil looked in 2020, we consumers continued to use petroleum products. When we stepped back and looked at the landscape, it was clear that our world still viewed oil as essential. Even though prices temporarily seemed to say otherwise, oil is not ready for a back seat.
As my colleague Joshua Garland writes in his article ‘The Long-Term Investor’s Paradox’: “Despite all the (economic) events and changes over time, prudent long-term investors are rewarded.” The rumors of oil’s demise were greatly exaggerated. Long-term investors who did not sell and held their ownership through the tumultuous year of 2020 have been rewarded in the Year of Oil.
Vice President, Wealth Management & Principal