Originally published in Japanese on June. 16, 2023
Rapid reversal
When Russian President Vladimir Putin’s vile invasion rocked energy markets in early 2022, fears flared of gas shortages and $200 oil—or worse. Global woe allegedly loomed—including doomsday import costs for Asian nations and deadly European winter blackouts. Japanese electricity costs soared as last summer’s heatwave fanned shortage fears. Energy firms’ profits—and stocks—soared.
But then market forces took over, squashing prices. Oil is down 39% off March 2022’s U.S. dollar peak. Asian natural gas is down 83% in yen. Europe? Its shortage fears faded fast as production boomed. Global liquid fuels output rose 4.4% last year, courtesy of OPEC, America and... yes, Russia. Its output rose in 2022. Russian crude headed for Europe was redirected to China and India after sanctions and boycotts—at steeply discounted prices. Both nations’ Russian imports set records.
Soaring output, sluggish stocks
Prices are signals—to businesses and markets. In 2022 they spurred more global production, infrastructure development and supply reshuffling. Global oil and gas rig counts rose 13.1% year-on-year—largely from the U.S.’s renewed shale boom. Energy firms are raking in profits—sector operating earnings globally jumped 120% last year. Though tiny in the stock market, even Japanese energy firms rose 24% despite COVID restriction headwinds. The boom has stimulated hiring and commerce in drilling areas worldwide. Local government tax revenues climbed, too. Free market magic!
But booming production sends a warning about energy stocks, which are more sensitive to prices than output. Forward-looking markets know more production inflates supply—impeding prices.
Consider 2009-2020’s global bull market. World oil and gas output surged amid America’s “Shale Revolution.” Yet globally, energy stocks rose just 81% versus world stocks’ overall 398%. Energy lagged in 8 of those nearly 11 calendar years.
That is happening again now, with world energy stocks down 0.3% in 2023 through April 26 versus world stocks’ 8.6% rise. Still, high hopes remain that China’s reopening will juice demand and profits—a fleeting, well-known factor swamped by global trends. Expect markets to look past temporary factors to those bigger trends. Yes, the International Energy Agency projects China ending COVID restrictions boosts oil demand by 2 million barrels per day—but not fast. Chinese firms have already ramped up buying in anticipation of the reopening. Any squeeze would be short-lived. Markets know that.
Bogus “big” cuts
Further, April’s big OPEC+ cuts are overblown. OPEC+ is not the world’s swing producer—the U.S. is. Moreover, OPEC+ planned cuts often fizzle. Take October’s supposed 2 million barrel per day reduction. The actual decline through March was 600,000. So yes, April’s cuts theoretically reduce global supply shy of expected demand—hyping price fears. Most likely? Another partially fulfilled cutback simply returns world supply—which topped demand by 440,000 barrels per day in 2022—closer to neutral with demand as overall world production climbs again.
Markets also pre-price well-known oil forecasts—fast—and move on. After October’s OPEC+ cut, world energy stocks popped up 15.9%—then fell 22.7% from their November 7 high through mid-March’s low.
But what of Russian retaliating against sanctions? It announced a 500,000 barrel-per-day cut in February. Through March, it had cut only 100,000 barrels per day. Russia says it has cut more, but its seaborne shipment levels defy that. No surprise—Putin knows huge cutbacks would decimate Russia’s petroleum-reliant revenues—crushing his already feeble, wobbly, shrinking economy. Price caps? You have already seen those are not ironclad, with Japan receiving an exception to import Russian crude from Sakhalin-2.
The reality: Absent full global commitment from all major countries, boycotts and sanctions never restrict—they simply redirect. The European Union found alternate diesel suppliers before February’s Russian oil products ban—and diesel prices actually declined. Russia found more crude buyers, like Pakistan, as its EU-bound shipments shifted east.
Hence 2023 supply should outpace recently dented expectations, tempering oil prices—energy stock headwinds. Also bearish for them: Past leaders usually lag when bear markets end, and vice versa. That is happening globally. Tech, communication services and consumer discretionary are leading big in 2023 after lagging in 2022’s downturn.
So own energy for diversification—but only for that. Do not hold much more than the world’s 5% weighting—as insurance against something truly whacky happening.
The energy sector’s response to 2022’s spiking prices was a free market master class. Cheer it—but don’t expect energy to lead now.
Ken Fisher is the Founder and Executive Chairman of Fisher Investments, a $200 billion global investment management firm spanning Asia, North America, Europe, Australasia, and the Middle East. He is the author of 11 books, including four New York Times Bestsellers, and writes customized columns in leading publications in 17 countries. He lives in Dallas, Texas. The views expressed here are his own.
