Oil Prices And Energy Stocks Heat Up: What Investors Need To Know
hi ABD I’m Meredith Heyman this is
industry insights thanks so much for
joining me the energy sector is once
again heating up that’s in part due to
the spike in oil prices as conflict in
the Middle East continues but will the
energy rally persist and how does
geopolitical unrest influence the market
joining me to discuss is Baron’s Market
reporter Jacob Sunshine Jacob thanks so
much for being here thanks for having me
absolutely So currently what’s going on
in the energy sector well you’ve got oil
up by a double digit percentage in a
period of months not uncommon for oil
but WTI Crude is O over $80 a barrel the
most recent development that everybody
is aware of obviously is the conflict
between Israel and Iran fortunately you
know Iran was unsuccessful in in its
attack because of the Iron Dome but
clearly there are tensions so anybody
involved in markets is concerned about
the supply of oil and and the price
going up um the price of oil since this
happen
hasn’t gone up that much maybe for like
a brief moment but one of the big
underpinnings while you have a little
concern about Supply is that you have
global economic demand has just
continued to be way better than expected
uh and that’s good for the price of oil
so that’s where that’s how you get a
price of oil right now above 80 tell me
more how is the conflict in the Middle
East influencing oil and gas related
stocks you know you’ve seen in little
moments here and there a little like
these little spikes intraday and
intraday trading in oil futures um but
the the price of WTI Crude oil is is
unable to get above the mid to high 80s
area um often times in the last few
years except for you know Russia Ukraine
when oil went to above a 100 oil
couldn’t get above the mid to high 80s
and I think one of the issues that that
the market is well aware of we saw this
when oil went above a 100 and came right
back down to the 60s the market is aware
of something that I love this one
strategist from core always talks about
the cure for higher oil prices is higher
oil prices so what that means is that
price goes up the risk of broader
inflation in energy and in other goods
and services goes up uh interest rates
remain up because nobody thinks that the
Federal Reserve at this point is going
to cut rates you have oil up and
inflation up what does that mean this
all hurts economic demand and ultimately
the market is aware that this would hurt
demand for oil that’s why oil goes up
and then it comes back down this is part
of a picture where the stock stock
market is about 4% below its all-time
high S&P 500 because people are
concerned about inflation rates in the
economy bigger picture when there’s
geopolitical risk how do investors
typically react well when when there’s a
low probability that geopolitical risk
will rear its ugly head uh you call that
risk which again is low probability you
call that tail risk it means that it
markets are unlikely uh to have this
huge and ugly move uh of to times um but
what happens is that risk uh flares up
you have a conflict in is in Israel and
Iran you also have a conflict in Russia
with Ukraine that’s well understood by
the market uh you have tensions in Asia
between China and Taiwan you actually
have multiple um tension points
geopolitically um that the market is
starting to become aware that it there
are low probability events in terms of
horrible Waring flareups and a spiking
price of oil but the market is aware
that the risk is growing just a little
bit right now there are some Rumblings
across the globe and so what’s going to
happen is if any of these risks comes to
fruition in full there’s a horrible War
um or something really awful happens the
price of oil spikes and really it
creates broader inflation for companies
that have to buy oil and lift their
prices and then the FED can’t just start
cutting interest rates and then the
whole financial Market is uh kind of up
in arms and oil prices and the
performance of the energy sector how
does that influence the economy and then
inflation if you were to think that
crude oil prices will Spike and and and
sustain that Spike you’re GNA have a lot
of buyers of crude oil uh like uh
Airlines uh that’s just one but there
are tons of companies out there that
produce things that make things that
need to buy um some sort of oil or crude
substance and they will be incentivized
to protect their profit margins to lift
selling prices and that’s how you get
inflation that’s how you get higher oil
bleeding into broader inflation
throughout the economy and that’s how
you get this scenario where you know the
FED can’t cut rates look the right now
nobody really thinks the FED is it
really wants to cut rates at this point
but if you were to get this spike in oil
from these geopolitical issues you get
even more inflation and there’s no
chance you get a rate cut maybe you’d
even get another rate hike and we know
the stock market and the economy does
not want that and how does the commodity
Market influence the stock market there
are many periods of time where Rising
commodity prices copper oil is
consistent with strong economic demand
growing earnings for companies and a
rising stock market the problem right
now is that the S&P 500 since that covid
bottom in March 2020 is up tons right so
we had this bare Market in 2022 but
we’ve recovered that we’re up tons and
tons in terms of and really Global
stocks and the S&P 500 reflecting what
has been an incredibly hot economy the
last few years and what has been great
earnings growth for companies the last
few years now the stock market has
totally reflected that in the price of
stocks so what does that mean now it
means that if Commodities go up and if
rates go up it’s going to take the steam
out of the economy and the market gets
ahead of that the stock market says we
can see that happening and stock price
go down because we’ve reflected the
economic strength now there’s a lot of
economic weakness uh that’s that that
remains a threat because of inflation
and rates what do investors need to know
when it comes to these two markets right
now if you want to buy stocks that right
now are the most vulnerable to a decline
small cap stocks economically sensitive
stocks uh like you know some Industrials
and and many banks and uh retail
consumer discretionary restaurants let
them drop a little bit I think they need
to come down a little bit they have been
but they may come down even more and
then you can go by because I don’t
really think we’re going to have a
recession the Market’s trying to price
in maybe slower economic growth maybe
but those cyclical and small cap stocks
wait for them to come down a little bit
and then you can buy if you don’t want
to time the market which is kind of hard
to do sometimes there is a great group
of stocks they are called dividend
growth stocks they’re very low
volatility uh they’re in defensive
sectors that aren’t that economically
sensitive find the ones I just did a
piece on it uh in the month of April uh
you’ll find it under my byy line on
dividend Growers find the ones that have
consistently grown their dividends they
don’t need to grow earnings that much
they’re cash cows their balance sheets
get bigger and bigger every few years
they can keep paying you higher and
higher dividends those are great yields
without a lot of volatility and that’s a
good deal for investors that don’t want
to time the market absolutely all right
Jacob we’ll be watching thanks so much
for joining me this is industry insights
I’m Meredith hyon thanks for watching
IBD we’ll see you next time
The energy sector is once again heating up, in part, due to a spike in oil prices as conflict in the Middle East continues. Barron’s markets reporter Jacob Sonenshine discusses the energy rally and how geopolitical unrest influences the market.
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