The future of 2021's top-performing sector - The Average Joe

    The future of 2021’s top-performing sector

    Victor Lei β€” Head of Research

    November 18, 2021

    oil sector

    November 18, 2021

    The energy sector has been the top-performing S&P 500 sector in 2021 as oil prices soared 61% this year β€” the highest level since 2014.

    • This sent oil-related stocks soaring β€” with The Energy Select Sector SPDR Fund (NYSE:XLE) up 50% this year.

    The future of oil: According to Reuters, the direction of oil prices in 2022 will depend on two supplier groups increasing oil production:

    • OPEC+, a group of the largest oil-producing nations is slowly ramping up production, refusing to increase at a faster pace.
    • US oil shale companies β€” struggling with labor and equipment shortage β€” are reluctant to raise production given demand uncertainty.

    The market is divided over oil prices. The International Energy Agency is forecasting higher production in 2022 β€” with lower prices ahead. But other energy forecasters see risks of prices spiking β€” with oil prices of $100 still on the table.

    Then there’s COVID making demand unpredictable β€” which is increasing and is expected to continue going up in 2022.

    • Last week, the US lifted travel restrictions and India opened its borders to vaccinated travelers after being closed for 20 months.
    • Yesterday, Biden called on the Federal Trade Commission to investigate potentially illegal activities among oil and gas companies keeping prices up.

    PTSD: In past periods of oil booms, oil companies ramped up production quickly β€” just to end up suffering from oversupply in the following years. This time, they’re more cautious…

    Oil production requires heavy upfront investment β€” and with a renewable energy transition underway, oil companies are even more reluctant to invest in new equipment.

    Investors: Whether you invest in it or not, oil prices have big implications for portfolios β€” as high prices could spark a mini-recession.

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