Should I Be Investing in Oil Stocks in 2022?
This is something I’ve been thinking over for a while. I’ve been in and out of oil stocks like Chevron (CVX) and Exxon (XOM) a number of times in the past and I’m always ready to jump on new opportunities.
With the onset of the global pandemic, oil stocks took a big hit. This was because everyone expected a major economic downturn and the lock-downs were said to reduce energy usage in the transportation sector. That made sense because more people worked remotely instead of commuting to work and air travel fell dramatically as well.
At the time, my thinking was that this was going to be temporary and that oil stocks would recover. I remembered how these stocks had also recovered years earlier after a similar decline when there was global hysteria about Ebola. I went ahead and invested thousands of dollars in Chevron and Exxon.
The stock valuations were quite attractive and it helped that these companies were also long-time dividend aristocrats, meaning they had continued to keep up and pay dividends for decades.
I waited a long time but for most of 2020 these stocks were stuck in a rut and came nowhere close to the gains I had anticipated. The naysayers continued to dismiss them as legacy companies with no future. Future profitability was limited because shale producers could quickly enter to increase supply when oil prices increased At the same time, the coming electrification of the automotive industry meant that demand for gasoline would likely decrease in the coming years.
Thus I sold my energy stocks at the end of 2020. Of course, as luck would have it, these stocks then went on to increase in price exactly as I had hoped earlier. They both increased more than 50% in price. I had sold too soon but that’s life.
Now as I tune in to the news, I can see some of the same pundits who had shot down energy stocks in 2020 are singing their praises. What do I make of that? Well, to me that’s a contrarian signal and I’m going to hold off buying more of them, though I could be wrong again.
No doubt about it, there are some things going in favor of energy stocks. Given the ongoing rise in inflation, commodities and natural resources are benefiting. Moreover, more air transport and trucking required to sustain the rise in home delivery have boosted demand for fuel. Oil prices have increased considerably over the past year.
The specter of inflation could support even higher oil prices. However, to the extent that consumer behavior normalizes and people shift back to spending more on services instead of goods, demand for oil may soften over the coming year. Under the Biden administration, there is also going to be an accelerated push to electrify the country and a move toward clean energy. For me these countervailing trends will more than offset inflation.
At the end of the day, the question is if oil companies stand to benefit from anything else other than inflation over the coming years. If it’s an industry in decline similar to Big Tobacco decades ago, then the long-term growth potential is limited.
Some of the European oil companies like BP and Shell seem to have recognized this and started to shift their business model to renewable energy. Whether that’s in fact practical in the long term remains to be seen. Even so, I haven’t seen this kind of shift among American oil companies. There appears to be more complacency in this regard.
The writing is on the wall and in that case it’s just a matter of time when the market will once again experience an epiphany and punish oil sector stocks. For that reason, I’m not ready to invest in this sector again quite yet.
