Why Energy Prices — and Energy Stocks — Are Rising From the Dead

A funny thing happened on the way to our hydrocarbon-free energy future.

This ...

That’s a one-year chart of the front-month U.S. crude oil futures contract. You can see the price has more than doubled off its November 2020 low, recently topping $75 a barrel.

Not only was that the highest price since October 2018 — it’s within a whisker of the highest since late 2014.

And the rip-roaring rally isn’t contained to crude. The price of natural gas has also surged more than 150% from its lows last summer.

As for retail gasoline? If you traveled by car for the Fourth of July weekend, you know it’s going up, up, up. Gas prices have climbed roughly $1 in the past year to $3.13, according to the American Automobile Association (AAA).

Naturally, those gains are lighting a fire under oil and gas stocks.

The Energy Select Sector SPDR Fund (NYSE: XLE, Rated “C-”) has surged 35% so far in 2021 — more than tripling the 11% gain of the SPDR S&P 500 ETF Trust (NYSE: SPY, Rated “C+”).

Another way to put it is a sector that was once left for dead is now rising from the dead.

What’s behind the gains? Good old supply and demand!

Demand has come roaring back thanks to the economic recovery, the resurgence in travel and heavy government stimulus spending. Producers also cut output during the worst of the COVID-19 pandemic, leaving inventories tighter than they otherwise would’ve been.

Major producing nations are trying to play catch-up.

In fact, members of the Organization of the Petroleum Exporting Countries (OPEC) cartel and Russia spent last week negotiating an increase in output last week. That would ease the cuts implemented last year, which amounted to around 6 million barrels per day (BPD).

But any rebalancing process will take time, and that means higher prices are likely here to stay for a while.

If you’re looking for new places to put your investment dollars, energy is worth a look again.

And my colleague Sean Brodrick has the sector well covered in his Wealth Megatrends newsletter, identifying high-quality dividend-growers in the natural resource space, among others. Click here to learn more.

Until next time,

Mike Larson