Energy Stocks Jump As Oil Surges Again—Prices Will Remain Elevated Through Summer

Topline

Energy stocks once again outperformed the rest of the market as oil and gas prices remain elevated due to inflation; despite ongoing risks to tight global supply such as Russia's invasion of Ukraine, some experts are now predicting that prices will decline by next year.

Key Facts

Energy prices have been surging in recent months: Demand remains high but supply has been tight ever since the West imposed sanctions on Russian oil after the country's invasion of Ukraine in late February.

Despite their first weekly loss in over a month last Friday, oil prices jumped again on Tuesday: The price of U.S. benchmark West Texas Intermediate sits at nearly $111 per barrel, while international benchmark Brent crude trades at more than $114 per barrel.

Major energy companies were among the best-performing stocks on Tuesday as the market rebounded from its worst week since March 2020, with the Dow gaining over 600 points in a relief rally.

Shares of Diamondback Energy rose 8% and Exxon Mobil by over 6%, while the likes of Halliburton, ConocoPhillips and Phillips 66 all rose by 5% or more.

Energy prices are down slightly compared to earlier this month (oil topped $120 per barrel two weeks ago), with some experts now predicting that prices may have peaked and could be set to moderate by early next year.

"Any country that is going to sanction Russian oil has likely now done so, and global oil producers have a strong profit motive to produce more, which they have announced they will do," argues Moody's Analytics chief economist Mark Zandi in a recent note.

Crucial Quote:

Oil and gas prices have "peaked" and should "meaningfully decline by early next year," says Zandi, adding, "energy price gouging is not something that's happening." While energy companies are "enjoying robust profits," it remains important they do well in order to "pump more oil to fill the shortfall left by the sanctions on Russian oil exports."

What To Watch For:

Supply in global energy markets remains too tight, and with the possibility of further sanctions against Russian oil exports still not off the table, demand will remain high, says Oanda senior market analyst Edward Moya. While "all the headlines seem to have turned bearish for oil" last week, he predicts that prices will easily remain above $100 per barrel throughout the summer.

Surprising Fact:

The S&P 500 energy sector has outperformed the rest of the market amid the widespread selloff so far in 2022, rising roughly 40% this year. Major energy giants like Occidental Petroleum, Marathon Oil and Halliburton have been among the top performers, rising 86%, 49% and 41% so far in 2022, respectively.

Key Background:

Oil prices have remained above $100 per barrel since peaking at a nearly 14-year high of $139 per barrel in March, shortly after Russia's invasion of Ukraine sent global commodities prices skyrocketing. What's more, with the conflict in Ukraine still ongoing, Russia's invasion could further "disrupt global energy markets, predicts Zandi. If oil prices rise to as much as $150 per barrel, U.S. gas prices will skyrocket to over $6 per gallon (compared to the roughly $5 per gallon national average today), he says. With high inflation leading to surging gas prices in recent months, President Joe Biden has considered pausing the federal gasoline tax, with a potential decision by later this week, according to Reuters.