In OIL We Trust
Only the Energy, Metals, and Utility sectors have rescued a poor 1st quarter performance on the market indices from a disastrous one.
Fueled by spiking oil and commodity prices which market forecasters predict will only continue amid heightened geopolitical risks between Russia and Ukraine, rising inflation, and interest rates.
The S&P fell 4.9%, the Dow 4.6%, and the Nasdaq 9.1% in the quarter ending March 31st.
The energy sector registered its largest quarterly gain on record, rising nearly 40 % as OPEC refused to increase output and Biden reluctantly opened the USA’s strategic oil reserves. This latest news prompted a 7% fall in prices to around $100 a barrel.
The announcement that the USA, from May 1st, will release one million barrels per day from its Strategic Petroleum Reserve [SPR] casts a wider dark shadow as it suggests the Biden administration does not expect any early resolution to the supply situation caused by the sanction implications of the Russian adventure into Ukraine. This past week, the gloom was further heightened by angry discourse as Russia demanded payment in Rubles, gold, or Crypto while its European customers chanted blackmail.
On a brighter note, Warren Buffett’s Berkshire Hathaway has invested over $7 billion in an aggressive accumulation of 15% of Occidental Petroleum [OXY] which has powered the stock more than 100% over the quarter to $60 at one point, but as of writing trades at $57.
Buffet has described management at OXY as ‘visionary and ambitious,’ as the company plans to achieve net-zero emissions before 2040. At less than a $60 billion market cap, it’s not inconceivable WB could decide to launch an agreed takeover or oil merger.
Berkshire Hathaway has held a long-term investment of over $6 billion in Chevron. Obviously, the legendary investor believes in the future of fossil fuels and is mindful of the green lobby, but he recently stated, “I would say that people that are on the extremes of both sides are a little nuts. I would hate to have all hydrocarbons banned in three years, or you wouldn’t want a world that, it wouldn’t work. And on the other hand, what’s happening will be adapted to, over time, just as we’ve adapted them to all kinds of things..”
During the pandemic, the energy sector got crushed but subsequently has more than recouped its losses. Nonetheless, investors should be wary as China continues with its lockdown formula in its futile attempt to achieve zero covid.
At some point and time, this is bound to affect demand and, given the rapidity of global events, could be compounded by the possibility of a resolution in Ukraine and a falling oil price.