The energy sector has been on fire for much of 2022. From December 31, 2021, to mid-June, the Energy Select Sector SPDR ETF (NYSEARCA:XLE) surged nearly 52%. In comparison, the S&P 500, Dow and NASDAQ were down about 22%, 16% and 31%, respectively.
However, momentum in the energy sector ground to a halt in mid-June after oil prices, which had climbed as high as $130 per barrel in early March, slipped below $120 per barrel and failed to break back above that level. The Wall Street algorithms attacked energy stocks and investors fled over fears that energy companies would suffer if oil prices continued to trek lower.
However, energy companies still reported wave-after-wave of better-than-expected earnings results. And while most slipped lower on the heels of the reports, since early August, energy stocks have resurged with a vengeance…
The fact is, even though oil prices are falling, I continue to remain very bullish on the energy sector. In today’s Market 360, we’re going to talk about one major tailwind for the energy sector… and I’ll share when I’m releasing my next batch of fundamentally superior energy stocks…
Europe’s Energy Crisis
Since Russia invaded Ukraine in February of this year, European reliance on Russian gas resources has been a central issue. In 2021, an estimated 40% of European Union (EU) natural gas came from Russia, with Germany, Europe’s largest economy, being the largest importer.
When Russia restricts supplies, mainland Europe suffers. And this is part of the reason why we’ve seen global gas prices rise over the last year.
The EU says it will cut Russian gas imports by two-thirds this year. However, that is much easier said than done.
You see, normally, energy prices decline in the fall as seasonal demand ebbs. But right now, natural gas prices remain at near a 14-year high.
Estonia is proud that it is building a large LNG terminal to help Finland and other European countries diversify away from Russian natural gas. Spain has also proposed a new natural gas pipeline to France that would help deliver natural gas within a year.
Unfortunately, winter is coming and Germany’s head of BNA, Klaus Muller, which is the agency in charge of rationing natural gas supplies, said, “If we fail to reach our target (20% cut in natural gas usage) then there is a serious risk that we will not have enough gas.”
Complicating matters further, Russia’s Gazprom recently announced that it would shut down the Nord Stream pipeline for three days of maintenance in the upcoming weeks. As a result, natural gas prices are expected to remain abnormally high.
Germany is expected to lose its competitiveness and may be forced to move some operations to lower-cost countries. Not surprisingly, due to potential electricity shortages, Germany postponed shutting down its three remaining nuclear plants that were scheduled to be decommissioned at the end of the year.
With the help of natural gas rationing, hopefully Europe will have enough natural gas until alternative LNG supplies and natural gas pipelines can be added and they can finally break away from Russian natural gas.
And if the EU is successful in cutting imports of Russian crude oil this year, crude oil prices could follow natural gas prices and soar back to recent highs.
Energy Stocks Remain Fundamentally Strong
Bottom line: Even though I think crude oil prices might temporally decline to $80 from $85 per barrel as seasonal demand ebbs, Russia’s bad behavior could send crude oil prices soaring in the event of any abrupt cut off to Europe.
Overall, I am very proud of my big energy bet and expect energy stocks will continue to post very strong quarterly earnings for at least the next two quarters.
In the past three months, the analyst community remains positive on our Growth Investor stocks and has revised their average consensus earnings estimate 21.1% higher in the past three months. The second-quarter announcement season is now over, and I am immensely proud that my average Growth Investor stock posted 62.3% annual sales growth and 455.7% annual earnings growth. Even better, my average Growth Investor stock trades at only 10.6 times the median forecasted 2023 earnings.
On Friday, I will be releasing my Growth Investor Monthly Issue for September, and I share why I think Growth Investor stocks will continue to lead the market as we head into the fall. Plus, I’ll be adding four new stocks to my Growth Investor Buy Lists – food, crude oil and natural gas stocks that continue to boast the best earnings and sales growth going forward.
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