Stressed about rising gas prices? There’s a major upside in stocks if you know where to look
Stocks have kickstarted the good-to-great year I forecast in December – the recent volatility and fears of war escalation in the Middle East notwithstanding. More pleasant surprises await.
One biggie: Energy stocks, whose recent outperformance should run strong late into 2024. The sector’s rally isn’t some OPEC+ cut-induced headfake or a temporary, war-driven spike. It’s the real thing. Let me show you why.
After energy’s strong showing in 2022 – riding skyrocketing oil prices as Putin invaded Ukraine – most seers imagined 1970s-style supply shortages, stoked by Russian aggression, OPEC+ supply constraints and China reaccelerating post-COVID. That, supposedly, would fire up oil prices anew – and power energy stocks.
Instead, 2023 humiliated energy bulls. The sector gained just 2.5% globally while world stocks soared 23.8%. S&P 500 Energy stocks fell -1.3% while the S&P delivered eye-popping 26.3% gains.
Why? Oil prices had plunged from 2022’s nose-bleeding high. Global production obliterated shortage fears and looked set to keep rising in Norway, Guyana and North America. Biden’s temporary ban on new federal land leases didn’t bite. As the world’s biggest producer, US output topped record highs.
Hence, oil prices ranged around $70 to $95 – stymieing energy firms, whose profits heavily parallel crude prices.
Now, energy bears repeat that error – but this time backwards, extrapolating 2023’s lag through 2024. They dismiss energy’s fresh rally, claiming OPEC+ cuts plus Ukraine and Middle East wars merely drive a “temporary” uptick. Fund flows, money manager surveys and valuations all show investors slashing energy holdings.
Nevertheless, 2024’s oil prices should stay strong, refueling energy firm profits – pumping oil and gas stocks up a big wall of worry.
This isn’t because of ongoing OPEC+ cuts. They are now merely symbolic as stocks and oil prices baked them in long ago. Ditto with widely watched regional wars – the recent wiggles notwithstanding. Nor can Biden take credit for his pause on new LNG (liquefied natural gas) export terminal permits – now facing blowback in Texas, Louisiana and over a dozen other states.
Rather, this is a simple story of incentives. Reaching for higher prices after the Ukraine invasion, energy firms moved boost production. Biden’s LNG “pause” – if it even lasts beyond November – is wholly unable to stop already permitted and under-construction terminals from amply supplying the world.
At the same time, US producers are completing wells far faster than they drill new ones. America’s “fracklog” of drilled-but-uncompleted wells fell 17.5% from a year ago.
That means less inventory can come online quickly – and well-positioned producers aren’t replacing it. After years of consolidation, the global mega-drillers dominate. With the biggies’ judicious production targets, US rig counts fell from 621 at 2022’s end to 506 now. Drilled wells are down 16.2% year over year. Output lags drilled wells by about six months. It will slow significantly soon.
Meanwhile, pessimistic analysts underestimate global oil demand – overemphasizing economic weak spots like Germany and China. Yet solid US GDP growth plus the eurozone’s better-than-feared economy and China’s steady consumption signal stronger than expected oil demand.
All of the above spells – you guessed it – a major rally in oil prices, which I expect to pierce 2023’s highs. That, plus cost discipline, should power an energy earnings bonanza. Big US and UK oil firms should benefit most. Their stronger balance sheets, low-cost production and integrated business models position them best to capitalize when oil prices rise but don’t skyrocket.
But you may think, high oil means high gas prices — bad! Unpleasant? Yes. But US GDP and consumer spending have proven repeatedly that oil and gas prices aren’t a big economic swing factor. The global economy and stocks have done fine through stretches of far higher energy price spikes than 2024’s potential.
So, enjoy this bull market as energy powers stocks higher.
Ken Fisher is the founder and executive chairman of Fisher Investments, a four-time New York Times bestselling author, and regular columnist in 21 countries.
