Is it time to take gains from the top-performing sector of 2021? - The Average Joe

    Is it time to take gains from the top-performing sector of 2021?

    Victor Lei β€” Head of Research

    December 15, 2021

    energy

    December 15, 2021

    Oil markets are finally returning to balance β€” 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 β€” COVID creating a supply and demand shortage.

    The result: 47% jump in oil prices since the start of the year β€” with a similar pattern in energy stocks β€” 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 β€” with inventories surging in 2022 due to:

    • Increased production β€” 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 β€” 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 β€” 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 β€” one of the largest groups of oil-producing countries β€” could opt to produce less oil. And Omicron could have less of an impact on travel than expected.

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