Energy stocks have rallied lately thanks to the Russia-Ukraine war and the consequent increased uncertainty in the global oil supply. According to what I heard on the news, Russia supplies about 15% of the world’s oil.
Anyone who invested in energy stocks, especially oil and gas producers, are probably sitting in the green. The war between the two countries aren’t likely to resolve soon. So, in the near term, energy stocks could probably go higher. However, the best time to buy any stocks is when no one wanted them.
Sample of energy stock Total Return Level data by YCharts
Black swans contributing to superb energy stock returns in the last 2 years
Not too long ago during the onset of the pandemic, due to expected slower economic activity, energy prices (and energy stocks) were trading at dirt-cheap prices. In fact, oil prices went as far as in the negative territory! That was really bizarre. And now, as crazy as it would have sounded even a few months ago, the WTI and Brent oil prices are hovering above US$115 per barrel. The WCS oil price is also close to the US$100 mark.
The graph above provides the total return of a sample of energy stocks that started with a pandemic market crash low investment of $10,000. Keep in mind that the 10-bagger achieved by Whitecap Resources (TSX:WCP) was thanks to having experienced two black swans (pandemic and Russia-Ukraine war) in favour of the timing of the investment and its smaller mid-cap size versus something like Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ).
In the short term (a few months to a year(?)), energy stocks could still go higher. However, the easy money has been made and the margin of safety is just not there. (Brave souls would have entered energy stocks during the pandemic lows. Even then, no one knew how long they would have needed to hold to capitalize on nice gains. They were lucky that the wait was less than two years.) I don’t know when, but oil prices will surely normalize at some point and revert to the mean likely at the US$50-70 per barrel level.
That said, some investors bought energy infrastructure stocks like Enbridge (TSX:ENB)(NYSE:ENB) and TC Energy (TSX:TRP)(NYSE:TRP) for income. These stocks are much less affected by the underlying commodity volatility. Too, these dividend stocks are fully valued now and I would not buy now.
Personally, I have very low energy exposure right now. I think it’s much safer for investors to put new money in attractive dividend stocks instead. Traders, on the other hand, may try their hand at energy stock (i.e., oil and gas producers) trading.
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Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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