can energy stocks continue to deliver explosive results?
I don't really like investing in energy stocks because of their strong cyclical nature, but it's good for academic research. Recently energy giants $Exxon Mobil.US and $Chevron.US recently released their third quarter reports that exceeded expectations. It is no wonder that energy stocks have outperformed the broader market so far this year, as their recent results and stock prices have outperformed technology companies in terms of revenue versus market expectations.
If we look at the components of the S&P 500, for example, energy stocks are among the top 10 gainers. And Warren Buffett's position in $Occidental Petroleum.US is still the best performer, having risen 145% so far this year, while other energy stocks have returned more than 70%. Compared to the Nasdaq tech sector's -34% for the year and the poor performance of star tech stocks, there's no denying that energy stocks have been the big winners this year.
But I think the good times for energy stocks are almost over, because energy companies' performance is highly correlated with oil prices, and they are affected by both production volumes and energy prices, and price fluctuations tend to have a greater impact on energy companies as the decision to increase or decrease production is often not easy. Energy companies have benefited from this. However, after the third quarter, crude oil and natural gas prices have now fallen sharply from their peaks.
What follows is my subjective judgment that Exxon Mobil's (XOM) 2022 results could top out. Is this likely to happen? Historically, Exxon Mobil's revenues and net income have been stagnant for years after the 2008 financial crisis, and then I think it's actually very difficult for energy companies to sustain growth. Then we look at the current price of light crude oil, which is still at a relative all-time high of about $85, and Exxon Mobil's stock price has been pretty much in line with the price of crude oil in the past, so I think we'll have to watch the next move in crude oil to see if there's room for energy stocks to go up.
Given the current macroeconomic situation, it seems that the economy is gradually going into recession. Under this premise, I think it is very difficult to maintain crude oil at $80 in a recessionary time, unless there is a geopolitical conflict that leads to a big rise in crude oil speculation, which I personally do not want to see.
I can't rule out the possibility that oil prices will rise, but I think we are in an environment where the Fed and the world's major central banks are starting to tighten, and the risks investors face today have increased significantly, especially since many energy companies are carrying relatively high debt, which may or may not be enough in the future. Once energy stocks enter the downward cycle, investors who are chasing high investments in energy stocks may be trapped for a long period of time, and investors have to be cautious.
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