Oil and energy stocks have emerged as one sunny spot of refuge for investors in 2022, as global markets continue to be roiled by the Covid pandemic, rampant inflation and acute geo-political uncertainty.
Stocks and cryptocurrencies all falter in 2022
Global markets have struggled since the start of 2022, with the uncertainty already created by the Covid pandemic further compounded by the outbreak of military conflict in Ukraine, as well as China’s decision to re-impose lockdowns in the key financial hub of Shanghai.
Rampant inflation has become a severe problem in major Western economies, rising to a 40-year high of 8.5% for the US in March, and hitting 7.5% the same month in the EU.
These unchecked price gains are prompting central banks to raise interest rates – the US Fed has lifted rates twice since the start of the year, while the Economist Intelligence Unit forecasts a total of seven hikes by the Fed in 2022.
Major stock indices around the globe have all plunged in response to economic uncertainty – as of writing the S&P 500 is down over 18% year-to-date (YTD), while the Nasdaq composite has fallen a staggering 28%.
Europe’s STOXX 600 is down more than 13%, Japan’s TOPIX has fallen nearly 10%, and the ASX has declined over 8%.
Investors have been unable to find sound refuge from these stock declines in traditional safe harbours such as bullion and bonds, or innovative parvenu alternatives such as cryptocurrencies.
Despite briefly breaching the $2,000 per ounce threshold in early May, the performance of gold has been tepid at best in 2022, and it currently sits at around $1,850.
Cryptocurrencies have taken a severe beating, with their fortunes severely worsening this week following the collapse of the stablecoin Terra, and the Luna token to which it’s long been pegged.
Crypto assets have seen their collective value drop by USD$1.5 trillion since breaching a peak of $2.9 trillion in November, for a decline of around 52%. [Text Wrapping Break][Text Wrapping Break]Bitcoin has dropped by around 57% from its peak of nearly $70,000, and currently sits at around $30,000.
Ukraine conflict boosts fortunes of oil stocks
The one area of the market which has posted an uncharacteristically strong performance in 2022 has been the energy sector.
Its fortunes have been buoyed by military conflict in Ukraine, and the ensuing sanctions imposed by the major Western nations upon Russia.
The transformation of Russia into a geopolitical pariah is set to stymie global energy supplies, driving up the price for oil and gas as well as increasing Europe’s dependence upon US energy.
Oil prices have spiked from around $75 per barrel at the end of 2021 to above the $100 threshold at present, while the energy sector is expected to report the biggest earnings growth for the first quarter.
The Energy Select Sector SPDR Fund – the ETF for S&P energy stocks, is up a massive 36% YTD, and almost all of the S&P’s top performing stocks since the start of the year have been in the energy sector.
The S&P’s top performing stock has been Warren Buffett-backed Occidental Petroleum – whose share price has risen by over 90% since the start of 2022. Other strong performers include Exxon Mobil, Hess, Haliburton, Marathon Oil and Valero.
Investors should remain wary of high volatility of in the energy sector however, with short sellers increasingly laying bets against stocks, and oil companies figuring prominently amongst the biggest losers in recent stock market routs.