The Energy trade keeps working

Covid created the opportunity, courage and diligence let investors benefit

COVID 19 and ill-conceived climate change policies in North America saw money flee the energy space and stocks fall, many to all-time lows. Brave investors saw the silliness of the climate change theory and the robust economics of oil & gas if commodity prices recovered.

Wise investors also put together the facts - that climate change policies would create a major energy shortage as COVID abated with the result that commodity prices would recover and energy stocks would benefit. Against the advice of ESG advocates and many sell-side analysts who continued to tout technology stocks and both ESG ETF’s and stocks with high ESG ratings, energy investors bet against the conventional wisdom.

How did that work out?

In 2021, all energy stocks I follow showed positive returns based on share price appreciation alone, let alone dividends. The average gain was 92%. That momentum continued into 2022, with year to date returns averaging 50%.

Those returns compare favorably to the 2021 return on the S&P average which was just over 26% and the year to date return on the S&P average which turned in a loss of more than 17%. The PIMCO ESG Fund (Canada) also showed a loss.

The underlying thesis behind the energy trade remains intact. Despite a growing energy shortage and relatively high prices for both oil and natural gas, the Biden administration prefers to beg OPEC and Venezuela to increase production to take the pressure off U.S. inflation rather than encourage development of America’s vast oil & gas resources. Germany is back to using coal for power generation and the United Kingdom is experiencing nosebleed prices for natural gas, a situation that harms millions of British citizens and shows no signs of ameliorating as the dispute with Russia over the Ukraine threatens gas imports from Russia on which Europe relies.

A recession will dampen energy demand and prices in the short term but will not increase supplies. As a result, the likely recession (we may already be in a recession) will see oil and gas prices fall until the recession ends and then accelerate to very high levels as the economy recovers since the only solution to high prices for fossil fuels is increased supply and the climate nutters running Canada and the United States just can’t get their heads around the reality that CO2 is harmless and their specious climate alarm has become tedious.

I will take advantage of the likely recession to double down on my own energy portfolio which returned 188% in 2021 and looks headed to another double this year.

Successful investing takes patience and courage. The highest returns come with high risk and diligence is required to understand the businesses underlying the stocks and judgment in choosing what risks to take.

Good luck with you investments.