In March 2021, crude oil was priced under $60 a barrel. One year later, oil prices have crossed the $100 threshold. For the most part, the rise in oil price has been gradual, steadily creeping up over the past 12 months. Some held out hope that the price of oil would start to come down again, but Russia’s invasion of Ukraine in late February 2022 all but guaranteed that the cost of oil will continue to climb.
Why Are Oil Prices Rising Because Of Russia?
Russia is a large country rich in natural resources, and it is responsible for roughly ten percent of the world’s oil supply. The war in Ukraine prompted the international community to sanction Russia in ways that are intended to inflict devastating economic damage.
So far, sanctions have not targeted energy production and exports, and Russia has not retaliated by withholding its oil. However, the possibility that Russia’s oil exports could be disrupted has the markets in turmoil, causing oil prices – and oil futures – to increase sharply.
Though governments around the world are working to stabilize oil prices by releasing reserves to reassure the market that there will be no disruption in supply, the market’s response to these efforts has been lukewarm. Among other issues, the release of reserves does not represent an alternative source of oil – it is a finite supply that will eventually be exhausted.
Energy giants like Exxon Mobil, Shell, and BP have announced plans to leave Russia, and many companies have pulled back from all business with Russia, energy-related or otherwise, to ensure they don’t inadvertently run afoul of sanctions. Such actions have added to speculation that the supply of oil will be impacted, causing further increases in oil prices.
In one report, Goldman Sachs analysts suggested that oil prices may reach $120 per barrel before there is a balance between supply and demand.
Other industry experts have speculated that prices could reach 2008’s record-breaking $147 per barrel in the coming months. If so, there is concern that the global economy will suffer, perhaps to the point of a full recession.
Do High Oil Prices Cause Recessions?
The United States has experienced more than a dozen recessions between 1950 and the COVID-19 pandemic.
In many cases, those recessions were preceded by higher oil prices. For example, from July to October of 1990, oil prices increased by 135 percent. A recession followed, lasting through 1991.
Between 1999 and 2000, oil prices more than doubled. A recession followed shortly thereafter in 2001.
From 2007 to 2008, oil prices increased by 96 percent, followed by the global financial crisis of 2009.
Among other issues, when oil goes up, the cost of nearly everything else goes up, too. That happens because consumer goods must be transported to the retail locations where they are sold to consumers, and transportation requires fuel.
This cycle creates inflation – an issue already top-of-mind for US consumers, lawmakers, and financial institutions. Historically, oil prices and inflation generally don’t recede until the larger economy experiences recession.
Do high oil prices cause recessions? Not necessarily. A direct cause-and-effect relationship hasn’t been established. However, there is certainly evidence to support a correlation between high oil prices and subsequent recessions. In other words, when it comes to the likelihood of a 2022 recession, there is cause for concern given the current state of the oil industry.
Do Oil Stocks Go Up When Oil Prices Go Up?
Generally, when oil prices go up, oil stocks go up as well. Charts that illustrate oil prices alongside the stock prices of oil giants like Chevron and ExxonMobil or energy indexes show that the company stocks and oil prices move in sync – most of the time.
That makes sense because oil prices naturally impact the amount oil companies receive for each barrel they produce – and that figure drives oil companies’ earnings and cash flow.
However, there are exceptions to every rule – particularly when it comes to the stock market – and higher oil prices don’t guarantee higher oil stock prices. For example, under the current circumstances, higher oil prices are related to concerns over the potential for disruption in oil supply. That, coupled with the financial losses oil companies may incur through divesting their Russian assets and severing ties with Russian partners, may impact companies and their share prices in unexpected ways.
In other words, rising oil prices indicate that now is the right time to buy oil stocks, but that doesn’t mean long positions in oil are risk-free. As with any trade, understanding the fundamental strength and financial health of a company before buying shares is critical to protecting your investment.
Best Oil Stocks to Buy Now
There are three types of activity that qualify companies as “oil stocks.” These include the exploration and production (E&P) of oil and oilfield services, the transportation, processing, and storage of oil, refined petroleum products, and natural gas liquids (NGLs), and refining/distributing petroleum products.
Some of the top oil stocks include:
- Chevron, which does just about everything related to oil
- ConocoPhillips, which operates in the E&P space
- Devon Energy, works in E&P and transportation
- Exxon Mobil, a major player in all areas of the oil industry
- Phillips 66, which handles refining and distribution
- Pioneer Natural Resources, which specializes in E&P
If you don’t want to invest in oil stocks directly, given the market’s current volatility, there are other options for adding energy assets to your portfolio. For example, energy-focused exchange-traded funds (ETFs) offer a mix of assets in every share, increasing diversification without the need to devote excessive capital.
There are more than 40 energy ETFs currently trading in the United States. They primarily track the S&P 500 Energy sector index, which has realized a return of more than 41 percent over the 12 months ending February 28, 2022, as compared to the broader S&P 500’s return of around nine percent.
The best energy ETFs to buy now include:
- First Trust Natural Gas ETF
- Invesco DWA Energy Momentum ETF
- Invesco Dynamic Energy Exploration & Production ETF
- iShares U.S. Oil & Gas Exploration & Production ETF
What Stocks Go Down When Oil Prices Go Up?
There are certain industries that have a negative correlation with oil prices. When oil prices go up, stocks associated with these industries go down – sometimes drastically. At the top of the list is airlines, which are extremely sensitive to the cost of fuel.
Along the same lines, any companies involved in transportation, shipping, and freight lose profit when fuel expense rises. Consumer discretionary stocks also tend to take a hit when oil prices go up, as consumers are faced with higher prices for non-negotiable items like gas and food, limiting funds available for non-discretionary purchases.
Investing in airline, transportation, and consumer discretionary stocks isn’t the right choice for those with short-term financial goals. However, as those stocks lose value, investors who can hold them long-term may benefit from buying at bargain prices.
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