Is it time to take gains from the top-performing sector of 2021?
Oil markets are finally returning to balance — with the International Energy Agency (IEA) expecting demand to surpass supply. This could be bad for investors, while good for consumers.
What’s the big deal? Energy became the top-performing sector in 2021 as oil prices surged — COVID creating a supply and demand shortage.
The result: 47% jump in oil prices since the start of the year — with a similar pattern in energy stocks — i.e. Energy Select Sector SPDR Fund (NYSE:XLE).
But here’s why next year could look different for oil. The IEA expects oil supply to surpass demand this month — with inventories surging in 2022 due to:
- Increased production — the US, Canada and Brazil pushed output to near-all-time highs.
- Omicron reduced fuel demand, while countries released oil reserves.
And the Travel sector just can’t catch a break. Omicron sent oil prices falling in recent weeks — as rising cases lead to more travel warnings. Many countries (incl. China and certain European countries) already partially locked down.
Looking forward: In the past 14 years — the energy sector returned 25% or more in three years. In each year that followed, the energy sector saw negative returns.
History tells us the energy sector could be seeing negative returns in 2022.
- For the consumer: We could finally start to see some lower prices at the pump.
- For the investor: Consider taking some of those energy gains off the table.
The counterargument: OPEC — one of the largest groups of oil-producing countries — could opt to produce less oil. And Omicron could have less of an impact on travel than expected.