Wednesday, March 9, 2022
The obvious place to start when thinking about investment implications of the war in Ukraine is energy. Russia is the third largest oil producer globally (12% of total) and the second biggest global exporter of crude after Saudi Arabia (about 11%, as shown in the LPL Research Chart of the Day). Roughly one-third of European natural gas consumption and more than 25% of its crude imports are sourced from Russia. Significant disruptions to those energy exports are a really big deal.
Oil’s roughly 70% rally year to date to over $120 per barrel, which clearly reflects market participants factoring in major disruption to those Russian energy exports, has powered very strong year-to-date gains for energy stocks. We’ve started to see some of that disruption already with the United States ban on Russian oil imports announced yesterday. The United Kingdom is following suit.
“Energy could continue to be a solid hedge against oil and gas supply disruptions in Europe in the short term,” according to LPL Financial Equity Strategist Jeffrey Buchbinder, “Fundamentals look good at the moment but it’s not a “set it and forget it” type of investment.”
High oil prices from solid reopening-driven demand and tight supply, along with producers’ improved capital discipline should help support energy stocks in the near term. But there is a lot uncertainty beyond the very short term. We don’t know how much Russian energy will be taken off the market and for how long. We don’t know how much of the gap the U.S. and OPEC can fill and how quickly. These are big questions for an overbought oil commodity from a technical perspective with very optimistic sentiment based on the lack of short interest in crude oil futures and the oil futures crowd sentiment poll by Ned Davis Research.
Prior to the Russian invasion we had maintained a positive bias toward the energy sector as the stocks and oil prices broke out from a technical analysis perspective. With inflation at 40-year highs, the economy reopening, and interest rates rising, the environment had appeared favorable for cyclical value stocks even before the massive geopolitical premium was priced into oil.
All of this suggests a market weight or even a slightly positive near-term bias toward energy is probably fine but we would urge caution (the sector only makes up 4% of the S&P 500 Index). A significant geopolitical risk premium is built into the price of crude right now (probably more than $30) that could come out quickly and from a technical perspective the sector looks significantly stretched and poised for a pullback.
We continue to pray for the safety of the Ukrainian people and peaceful resolution to the conflict.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
All index and market data from FactSet and MarketWatch.
This Research material was prepared by LPL Financial, LLC.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
- Not Insured by FDIC/NCUA or Any Other Government Agency
- Not Bank/Credit Union Guaranteed
- Not Bank/Credit Union Deposits or Obligations
- May Lose Value
For Public Use – 1-05254191