Fisher Investments Review What’s Ahead for Energy Stocks

Transcript

Ken Fisher:

So energy stocks have been a bafflement for an awful lot of people for the last few years. When 2022 got going, and the bear market of 2022 —moderate bear market though it was—got going, an awful lot of people expected, and they were right, that energy stocks would do well.

Partly, that was the notion that energy is more stable than the growth stocks are. Partly, that was the notion that energy is driven by the big vertically integrated "globals"—that's most of the market cap— and in that environment they would do well—tied to fears at the time that central banks would raise rates and that would starve off a lot of other people. But the big global banks, big global energy stocks would be good with that. And partly that was because in the aftermath of Putin's invasion of Ukraine, tragic though it was, of course, it also, particularly in the short term, pushed up oil prices. And energy stocks are more oil-price sensitive than they are oil-volume or output sensitive. That's something that confuses people.

Now, the fact is, if you can figure out what's going to happen to the price of oil, you have a pretty good shot at figuring out what's going to happen to energy stocks. That's really the biggest, strongest force there. And in that, when the price of oil went up to over $100 a barrel in the immediate onslaught of the Ukraine war, an awful lot of people thought it would keep going and sustain over 120. And that high oil price—over $100, with the notion of it sustaining— made energy stocks in 2022 do great.

But then the energy bulls missed that the immediate effect of that, of course, the high oil price is to make the oil producers produce more energy, and they did in abundance. And by the time you got to the spring of 2023, I'm saying, the price is falling.

Energy stocks are over. Those who are thinking it's going to keep going are wrong. They did think it was going to keep going and they were wrong. When you look at global energy stocks in 2023, they're basically flat while the world market, depending on whether you want to look at all local currency's average or whether you want to look at global currency was up in the mid '20s.

Now the fact is, coming into '24, most people have remained bearish on energy— while we've come to a different circumstance. Energy prices, with all that extra capacity that came on, have come down. And as the prices come down, they have been range bound between the high 70s and 90. The energy producers have stopped drilling. They're completing wells that they'd already started. But the new well count has gone through the floor—in terms of trying to start new wells. And as you look at drilling activity, there's roughly a six-month lag between when they get that going and when the actual output increases. And so you can see ahead that energy output is going to fall.

Meanwhile, energy demand is stronger than people anticipate because global GDP overall has been stronger than people thought it was a year ago— or would be a year ago—and continues to be relatively strong, particularly outside of America now, where it was weaker before. And in that, I mean, just as I speak in April, eurozone GDP releases have been stronger than expected while inflation in Europe has been lower than in America and fallen faster than in America— which is something that people in America don't pay much attention to—but should. And with that stronger demand for energy at a time that the increase in output is shrinking to the point of almost nonexistence, soon, the price of oil will go up. But the price of oil going up means that energy stocks will go up.

And that's my forecast for energy stocks for the remainder of the year. It will be the part of the value universe that leads the charge as 2024 progresses and become a market leader, whereas it was a market laggard.

Thank you very much for listening to me.

Voice of Ken Fisher:

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