Energy Funds Lead Again, But Ukraine War Makes Future Uncertain

The wild ride in which the energy markets have been showing no signs of abating. After topping the charts in 2021, funds investing in energy stocks again turned out to be the strongest performer of any sector in the first quarter.

But some investors are questioning how long that streak can continue in the face of heightened uncertainty, as European leaders debate cutting Russian imports, as sanctions, inflation and the pandemic threaten global growth.

“I don’t think I’m going to add energy exposure right now,” said John Maloney, president of M&R Capital Management, a New York wealth management firm. “The stocks may have more upside, but you don’t need to take the last dollar of profits.”

Energy funds rose 32 percent in the first three months of the year, the largest return of any sector. In 2021, as demand rebounded from the depths of the Covid-19 pandemic, energy stock funds gained 40.9 percent, compared with the S&P 500’s 26.9 percent rise.

As is often the case, energy stocks took cues from oil prices. Brent crude, the closely watched global benchmark, rose on March 7 to an intraday high of nearly $140 a barrel – the highest point since 2008 – as the United States prepares to ban Russian energy products from entering the country. It has since settled at nearly $100 a barrel, and the US Energy Information Administration expects it to trade at an average of $105 a barrel this year, well above the $71 average in 2021.

EU leaders continue to debate how quickly and how strongly they can reduce their dependence on Russian energy. But even without a complete ban on Russian energy in Europe, many companies are avoiding it. “There is a crimson letter associated with the purchase from Russia,” said Tom Kloza, global head of energy analysis at Oil Price Information Service. This could lead to higher oil prices globally.

European Union leaders also announced ambitious plans to buy more LNG from US producers. Even before the Russian invasion of Ukraine—and a threat by Russian President Vladimir Putin to turn off the tap if countries did not pay in rubles—low natural gas stocks and record prices in Europe prompted American producers to send more gas there. European LNG imports from the United States hit a record high in December that has since been surpassed in January and February.

but there is a problem. The United States, the world’s largest energy producer, does not have significant spare capacity either in oil or gas.

“The obstacle to many Gulf Coast LNG projects has not been permission from the government but a lack of financial support,” said Jason Bordoff, founding director of the Center on Global Energy Policy at Columbia University. “But the Europeans have signaled that they intend to sign more long-term contracts to supply LNG, so that should help those projects reach final investment decisions.”

Financial backers were not the only ones reluctant to fund new exploration and production. Shareholders are demanding a larger portion of the profits after years of poor investment returns on energy funds. According to Morningstar Direct, the typical investor who bought an energy equity fund five years ago would only have broken up recently. So the energy industry has been focusing on shareholder returns rather than pumping profits back into its business, a strategy that markets refer to as capital discipline.

“Capital discipline is not just about the areas you are going to explore,” said David Lebovitz, global market strategist at JP Morgan Asset Management. “The new approach is going to profitable fields and drilling five to seven wells, instead of 10. If you’re an energy company, you don’t want to flood the world with oversupply.”

In the portfolios that Mr. Maloney manages for clients is the Vanguard Energy exchange-traded fund. This $8.3 billion fund generated 39 percent in the first quarter after a 0.1 percent management fee. Exxon and Chevron are the two largest properties, with an overall weighting of 38 percent. Exxon shares grew 36.5 percent in the first three months of the year. Chevron shares rose 40.1 percent.

Chevron has temporarily halted sales of some chemicals and consumer products in Russia and says it has no exploration or production operations there. It has a 15 percent stake in an oil pipeline that carries crude oil from Kazakhstan to a Russian terminal on the Black Sea, where shipments have continued uninterrupted. There, Kazakh oil can be blended with Russian crude, although Chevron said its “efforts are being conducted in accordance with US law.”

Exxon, which has done more business in Russia, announced on March 1 that it was leaving the country and would not make further investments there “in light of the current situation.” She was running a large exploration project in Russia’s Far East known as Sakhalin-1.

After the surge in stock prices over the past year, Mr. Maloney said, he has primarily viewed energy stocks as a hedge against other holdings that might move in the opposite direction, such as airlines, shippers and other fuel-sensitive companies. the prices.

Leave a Comment

Your email address will not be published.