Many investors, including Warren Buffett, are betting that higher crude oil prices are here to stay for a while. It’s a good wager, thanks to the spike in oil prices from about $75 a barrel at the end of last year to above $100 now. Nearly all of the top performers in the S&P 500 this year are energy stocks.
Buffett-backed Occidental Petroleum (OXY) has doubled in price, making it the best performer in the index. The company will report its latest earnings after Tuesday’s close. The S&P’s energy sector ETF (XLE) has soared more than 40% this year. Valero (VLO), Marathon Oil (MRO), Halliburton (HAL), Hess (HES) and Exxon Mobil (XOM) are big winners too.
So who needs the so-called FAANGs of Big Tech — Facebook owner Meta, Apple, Amazon, Netflix (NFLX) and Google parent Alphabet — when you can own a stock that actually trades with the ticker symbol FANG? That would be oil and gas company Diamondback Energy (FANG), which has jumped nearly 25% this year while the leaders of the once-ascendant Nasdaq have plunged. (Netflix (NFLX) has plummeted more than 70%, making it the S&P 500’s biggest loser this year. Meta Platforms (FB) is down more than 40%.)
But is it too late to cash in on the black gold rush? The sector remains incredibly volatile, and short sellers are increasing their bets against energy stocks, hoping to profit from the possibility of a further fall in prices. Oil stocks were the biggest market losers Monday when the Dow fell more than 650 points.
There is a case to be made that inflation is not going away anytime soon. The Federal Reserve is raising rates, which could prop up oil prices for the foreseeable future, and energy stocks and other commodity-sensitive sectors could lead the market for a sustained period, just as big tech did for the past decade.
And as long as oil prices remain relatively high, that bodes well for profits for major oil producers, drillers and other companies with exposure to crude.
“Given the jump in oil and gas prices this year, it will likely not be a surprise to anyone that the energy sector is expected to report the largest earnings growth for the first quarter,” Wade Fowler, senior portfolio manager at Synovus Trust Company, said in a report last week.
Oil stocks still have a ways to go to catch up with tech
Other experts noted that US energy companies are poised to get a boost from many European nations cutting back on Russian oil due to Moscow’s invasion of Ukraine.
“As Russia remains a geopolitical pariah, the market is expecting Europe to increase its reliance on US energy supply, which will benefit the US-based energy sector,” said analysts with Morningstar’s quantitative research team in a report late last month.
Energy stocks currently make up just a small segment of the overall market, about 4.4% of the S&P 500, according to data from Bespoke Investment Group. Tech, despite its recent slump, still makes up about 28% of the index. There’s a long way to go for the oil sector to catch up.
Bespoke noted in a recent report that the gap should narrow further, and investors shouldn’t rule out the possibility that energy stocks could regain a bigger leadership role in the broader market. The analysts pointed out that after the tech stock crash of 2000, energy stocks eventually matched tech’s weighting, although not until 2008.
“We’re not suggesting that Energy is set to get back in-line with Tech like it did in the mid-2000s when commodities had a huge bull run after the Dot Com crash,” the Bespoke analysts wrote, “but it’s certainly not impossible either.”
For what it’s worth, Buffett is also making a big wager on the oil patch beyond Berkshire Hathaway’s (BRKB) investment in Occidental. Oil giant Chevron (CVX), the best performer in the Dow this year, is one of Berkshire’s top four holdings.
The Oracle of Omaha’s company revealed late last month that it now owns a stake in Chevron worth $25.9 billion, up from about $6 billion at the end of the fourth quarter. Only Apple (AAPL), Bank of America (BAC) and American Express (AXP) are larger positions for Berkshire.