Oil is still liquid gold 150 years later
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Stocks in 2022 performedthe opposite of how they had in 2020 and 2021.
After two years of solid performance, the technology sector got hit hard in 2022.
On the other hand, energy stocks that suffered in 2020 due to the decreased demands from lockdowns excelled in 2022 as a result of supply impacts.
While the overall market was down in 2022, energy stocks were positive; the best-performing stocks in the S&P 500 last year were all energy-related.
Data fromBankrate
Why Energy Performed Well
To understand why energy performed so well in 2022, we need to look at what happened in 2020 — 2022.
In early 2020, the pandemic hit the world, driving down the demand for energy. People required less energy — this includes natural gas and coal, as electricity demand dropped, as well as oil (petroleum) since people were not flying and driving as much.
Demand got so bad that there was a time in April 2020 the future price for a barrel of crude oil was negative. Oil companies were paying people to take the supply off their hands. But good times never last. Below is the global price of Brent Crude oil.
Source: FRED, Federal Reserve Bank of St. Louis
Price is a factor of supply and demand. Oil price rebounded in 2022 asdemand came backdue to countries removing lockdown restrictions coupled with a reduction in supply.
Other energy markets besides oil, such as natural gas or electricity, have experienced similar economic laws. The war in Ukraine has led to less natural gas from Russia, increasing the price. Natural gas is mainly used for heat and electricity generation.
Electricity generation now has higher input costs. And during the lockdowns, when electricity demand decreased, older and more expensive plants closed as electricity prices were low. As a result, supply decreased.
With all of this, we can see why energy stocks performed so well in 2022. The underlying businesses, the raw materials and electricity, rebounded in price. This helped the bottom line for all the companies whose stocks are listed above.
Almost all of the best stocks in 2022 dealt with oil or natural gas — I think the only exception is First Solar, a growing solar company that deals with electricity.
What Energy Stocks Will Do In 2023
Wouldn’t we all like to know? Unfortunately, none of us have a crystal ball. But we can speculate following the logic provided above.
Predicting energy prices in itself is extremely difficult; this applies to natural gas, oil, and electricity.
But looking primarily at oil, one of the biggest unknowns is China. They are the second largest consumer of oil. Their economy is opening back up with less restricted COVID policies, which would lead to more consumption, but who knows how long that will last.
The demand side is a little unknown, but the supply side is even more uncertain.
OPEC, as a group, controls a large portion of the oil production market. In late 2022, they agreed tocut the supply of oilthey produce, thereby increasing the price.
Russia is thethird-largest producer of oiland thesecond-largest producer of natural gas. There is still uncertainty revolving around the war in Ukraine and sanctions.
Forward markets for US energy prices have decreased in recent months — meaning those in the industry now believe electricity prices will be lower than they had forecasted a few months previously.
All this to say, I do not think energy stocks will have a great year. They may have a positive year, but they will not have a year as great as last.
2022 was a result of several supply shocks. I don’t foresee surprises of that magnitude again this year.
Other Stocks to Look Into
The energy sector won’t provide returns as great as it did in 2022. Diversification is always important for investors.
Below is a table showing the gains for each sector from 2022 and 2021.
Image from author | Data from Yahoo Finance
It’s clear that energy sector returns aren’t sustainable. So what other sectors are worth looking into for 2023?
Due to the Federal Reserve reducing its balance sheet andraising interest rates, tech stocks and real estate are still risky. They had great returns in 2021 with low-interest rates but got slammed in 2022 when rates were raised. While the Federal Reserve will hit its terminal rate at some point in 2023 (likely the first half), these sectors may rebound, but timing it will be difficult.
If the recession that most economists expectin 2023 actually occurs, a good bet would be Consumer Staples. These are companies like P&G, Walmart, PepsiCo, Costco, and Mondelez. People will always buy these products or shop at these locations regardless of the economic environment.
Plus, most of them offer healthy dividends.
Another option to consider is the Health Sector. The government spends a great deal of money on healthcare, and individuals will also pay as needed in emergencies. The latestjobs reportshowed once again, healthcare added many jobs.
Job growth in health care averaged 49,000 per month in 2022, considerably above the 2021 average monthly gain of 9,000.
One could take the optimistic approach that since the healthcare sector added so many jobs, they are growing.
2023 looks murky; most are unsure of what will happen or are unconfident in their predictions. It will be exciting to see how it shakes out.
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