By Matthew Gaude & Shawn McGuire
The trajectory of energy prices in 2023 presented a fascinating yet complex narrative that affected consumers on a regular basis as they pay for gas, electricity, and utilities in general. You simply can’t help but notice when there is a change in your monthly utility bill or when you fill up your car with gas.
This year, we’ve seen quite an interesting change in those trends. As we entered 2024, we were bullish on two sectors: Energy & Precious Metals. Both sectors have done well since the beginning of this year.
In this article, we share some ideas as to what’s going on so you can be informed about broader changes, why we bought energy and pipeline companies as well as help plan for what’s ahead.
Geopolitical Tensions in the Middle East
The recent surge in global oil prices, with Brent Crude nearing $90 a barrel and West Texas Intermediate at $86, is significantly influenced by escalating geopolitical tensions in the Middle East. The conflict between Israel and Palestine and the potential for broader regional involvement, particularly with Iran, has heightened concerns about the stability of oil supplies from this crucial region. Iran’s pivotal role in the oil market means any disruption in its exports could dramatically impact global supply and prices. Following is an oil chart showing current prices at levels we have not seen since October 2023.
This situation, of course, is not the only geopolitical issue the world faces, as the fight between Ukraine and Russia continues. Geopolitical risk remains present in the market as Ukraine strikes Russian oil refineries, and Houthi militant attacks in the Red Sea have led to the diversion of crude deliveries around the Cape of Good Hope in southern Africa.
In 2022, President Biden made the decision to ban the import of Russian oil, which further limits the global oil supply. Both conflicts, with the potential to expand in the future, have been part of the reason why prices of energy have risen lately. As long as Biden is President, expect Mideast attacks and geopolitical risk to remain elevated.
Why Oil Is Outperforming the Nasdaq and Technology Stocks
Oil is crushing the Nasdaq 100 so far in 2024. Most investors haven’t been watching, but the price of West Texas Intermediate crude is up over 14% on the year, almost doubling the Nasdaq’s 7.7% gain. One way to invest in the energy sector is the SPDR Energy Select ETF (XLE). It holds energy heavyweights including Exxon, Chevron, Conoco, Hess, and Phillips 66.
As the price of oil increases, companies mentioned above can sell their oil for higher prices, which means higher profits. We believe we will continue to see XLE increase, although we could see a short-term pullback that may be an opportunity to add to existing positions.
Another reason we have seen oil outperform technology as well as most other sectors is investors are rotating out of sectors that have performed strong last year and buying sectors, such as energy, that have not increased in price, but present better risk to reward opportunities in the current economic and financial environment.
Higher Prices Are Ahead for Consumers
Andrew Lipow, President of Lipow Oil Associates, LLC, has over 30 years of experience in the petroleum refining, trading, and consulting industry. In a recent note to clients, he wrote:
“[Last] week, Gulf Coast refiners, which account for nearly 50% of the nation’s refining capacity, began to transition to the more expensive summer grade gasoline blends.”
That means that higher prices are ahead for consumers. I expect further increases of another 10 to 15 cents per gallon over the next two weeks.
Since Andy’s note, we have seen gas prices go higher to the current average retail price of $3.63/gallon.
Those higher prices are in addition to the higher prices that have already begun to hit drivers.
Let’s go to OilPrice.com:
It couldn’t have come at a worse time. Refinery outages in the United States are colliding with the beginning of driving season, and analysts are warning that drivers could see a spike in prices at the pump.
…Prices are set to climb even higher, according to some analysts. “There is every reason to believe gasoline prices will screech even higher going forward,” said Tom Kloza, head of energy analysis at Oil Price Information Service, according to Reuters.
The reason for the higher trend is higher summer travel demand, which is about to kick off, declining gasoline inventories, and refinery outages.
Indicators we are watching suggest more economic growth in the U.S., continued relatively low unemployment, higher energy prices, and higher costs generally.
On Monday, April 1, for instance, a key measure of U.S. manufacturing activity showed growth for the first time in 17 months, above Wall Street expectations and a positive signal about the industrial part of the U.S. economy.
Supply and Demand
One basic economic lesson we all learned in school also helps us understand why prices are increasing: supply and demand. As economies continue to grow and use more oil for energy, the supply hasn’t been able to match that spike in demand. There are a variety of reasons for that, including a lack of investment in drilling for oil, and the increased cost of production (due in part to inflation).
Going forward, it will be important to see if the U.S. is able to increase our supply of energy to match current and future energy needs. Current U.S. oil production is 13.10 million barrels per day, down from all-time highs of 13.3 million barrels per day.
According to a March 14th Barron’s article, “World Oil Demand Grows Amid Red Sea Disruptions: IEA”:
Global oil demand is forecast to grow more than expected due to a brighter U.S. economic outlook and rising fuel needs of ships rerouted away from the Red Sea, according to the International Energy Agency.
Commercial ships have been taking longer and costlier journeys around the southern tip of Africa to avoid attacks by Yemen’s Houthi rebels in the Red Sea, a vital international trade route.
The IEA said world oil demand growth is now forecast to increase by 1.3 million barrels per day (bpd) this year, 110,000 bpd higher than in its previous monthly market report.
Adding to tightening worldwide supply is this from Bloomberg:
Mexico’s state-controlled oil company plans to halt some crude exports over the next few months, a move that would cut supply from a tightening global market. Pemex’s plan to suspend some exports is part of an effort to produce more domestic gasoline and diesel ahead of their June 2nd presidential election.
Rising Inflation
Over the last three years, we’ve seen inflation at unusually high levels. Although it has fallen from its peak of 9.1% in 2021, it is still higher than normal. Over the last several months, rising energy prices has led to inflation being higher than the Federal Reserve would like to see, preventing inflation to decline to their 2% threshold. If energy prices stay elevated, and continue to go higher, this will continue to provide an environment for the Federal Reserve to hold off on lowering interest rates.
Navigate Every Economic Change Ahead
While none of us can predict the future, what we can do is adjust our plan when circumstances around us change. Regardless of if energy prices continue to rise, inflation shoots back up, or something completely unexpected happens in the economy, the key is to be able to adjust to any economic changes while still meeting your financial goals.
Our team stays atop not just the economic news of the day, but how to adjust to those changing circumstances so we can best serve you and your family. If you want to partner with a team who can do all that (and more), call our office at 770-552-5968 or email [email protected]. Or, if you prefer, you can simply click here to schedule an appointment online. We’d be happy to help you build a financial future you can look forward to.
About Matthew
Matthew Gaude is an *investment advisor representative and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. Working first as a commodity broker and then as a Business Development Manager for a national broker-dealer in previous jobs, he has the insight and experience to help clients understand the complexities of the market and implement strategies to minimize risk. To learn more about Matthew, connect with him on LinkedIn or visit www.liveoakwm.com.
About Shawn
Shawn McGuire is a financial advisor and the co-founder of Live Oak Wealth Management, a financial services firm in Roswell, Georgia. He serves the planning and investment needs of corporate employees, those approaching or in retirement, and 401(k) plan sponsors. He has worked in financial services since 2002 in positions ranging from financial advisor to stock broker and portfolio manager. As a CERTIFIED FINANCIAL PLANNER™ professional, he is trained to help clients with virtually all their financial needs. To learn more about Shawn, connect with him on LinkedIn or visit www.liveoakwm.com.
Securities offered through American Portfolios Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through *American Portfolio Advisors, Inc., a SEC Registered Investment Advisor. Live Oak Wealth Management, LLC is independently owned and not affiliated with APFS or APA.
Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc. (APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk, and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. Seek tax advice from a tax professional. Neither APFS nor its Representatives provide tax, legal or accounting advice.