The energy sector is one of the few places where investors have found safety so far in 2022. While future energy stocks Plug Power Inc. and Enphase Energy Inc. are both down 16 percent year-to-date, shares of legacy oil and gas major Exxon Mobil Corp. are up 28.6 percent so far in 2022.
The outperformance of energy stocks has been driven in large part by soaring crude oil and commodity prices. At the same time, a rotation out of the tech sector has weighed on growth stocks like Apple, Inc. and Amazon.com, Inc..
Energy sector investors are celebrating a hot start to 2022, but volatility in the energy sector can swing both ways.
Energy prices have historically been extremely volatile relative to other goods and services, which is one reason why the Labor Department excludes energy prices in calculating its so-called “core” consumer price index (CPI) and producer price index (PPI) readings. It’s also why the Federal Reserve’s preferred inflation measure is the core personal consumption expenditure (PCE) price index, which also excludes energy prices.
Energy prices are benefiting from a number of factors that are increasing market volatility, including tensions between Ukraine and Russia, supply constraints from OPEC, a supply chain shortage driven by the global transition from petroleum to clean energy and booming demand from the post-pandemic global economic reopening.
Assuming energy price volatility will continue for the foreseeable future, investors can protect their portfolio from energy market downturns by focusing on oil and gas producers that have relatively low production costs, clean balance sheets and low leverage ratios. These companies are better prepared to potentially weather the next volatile downturn in oil and gas prices.
By Wayne Duggan
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