Last week, we warned our readers:
“…we’re not expecting oil prices to keep growing or stay high for much longer.”
In just several days, the price of West Texas Intermediate (WTI) dropped over $10 per barrel, confirming our analysis.
A 10% decline in the price of the most traded commodity is a massive stress for the energy sector. For instance, the oil giant Shell estimated that a $10 change in the price of crude oil may lead to a $2.1 billion change in its adjusted earnings.
Depending on the scale and cost of their production, other major energy companies will likely have similar or higher sensitivity to the price of oil. This is why the entire energy sector has dipped.
The leading energy fund, Energy Select Sector SPDR (XLE), is in decline along with oil prices.
Many investors are surprised by such a swing, but we saw it coming. At least our research pointed us in the right direction.
While we didn’t expect such a quick turnaround, we sure glad we warned you right on time. We hope it helped your portfolio preserve its value.
Great News for Economic Growth
What may seem like bad news for oil traders is actually positive for the global economy.
The post-COVID surge in oil prices led to decades-high inflation rates. Higher oil prices raised energy and transportation costs and sent the prices of consumer goods skyward.
Some industries absorbed this early, like utilities or airlines, but some lagged. Central banks embarked on an unprecedented global tightening campaign, and apparently, we see the first signs that they have succeeded…
Primary inflation gauges have dropped a lot from the recent highs, for example.
- The Consumer Price Index (CPI) slowed its annual growth from 9.1% in June 2021 to 3.7% this August.
- The annual change in the Personal Consumption Expenditures (PCE) Index dropped from 7.1% to 3.5% over the same period.
But while the trend is positive, interest rates are still high. Policymakers will likely start lowering them once it’s clear that the economy is in good shape and inflation is not a threat.
A return of high oil prices could derail this plan and let central banks keep interest rates higher for longer… No one wants that because it will limit spending and economic growth.
In other words, moderate oil prices are better for the economic recovery.
On top of that, we think that oil demand will drop in the coming years. This is not supportive of the prices. For sure, there could be short-term surges, but we would rather watch this industry from the sidelines.
We prefer critical minerals to fossil fuels as an investment. Lithium, copper, nickel, cobalt, graphite, rare earth elements… those are our favorites.
These commodities (and related companies) could have a strong potential to deliver solid gains to their investors.
Thank you for your loyal readership,
The Financial Star team