Energy investors don't seem to be buying the rising inflation story
Looking at the price of $XLE, the ETF peaked on June 7. Since then, it has taken a long time to rebound to newer highs.

During the time between June 7 and today, Europe's energy crisis continues to worsen and the US has been releasing more oil from their SPR into the market.

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These catalysts would've brought the energy ETF back to new highs. But they didn't. The price of WTI Crude has kept declining since its June 7 peak.

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Maybe the market is pricing in a recession.

While some say that a victory in Ukraine will truly bring oil prices down, I say that might not be the case. The sanctions will remain in place to continue punishing Russia for choosing to invade in the first place. Also, Ukraine's infrastructure has already been badly damaged by the war, and that it would need time and capital to rebuild.

Plus, Ukraine wasn't a major oil-producing nation, to begin with. It was a major producer of fertilizer and crops. Winning the war in Ukraine will only help reduce the global food crisis.

Some will say that renewables will save the world from an energy crisis and reduce the demand for fossil fuels. However, renewable energy technology today is inefficient. And despite years of investment and expansion, renewable energy still makes up a tiny portion of the energy produced in the world. Nuclear energy is just getting started with its ramp-up. That's why I don't see green energy playing a big influence on the declining price of oil.

Thoughts on why energy prices have kept declining despite concerns over an impending energy crisis?
ParrotStock's avatar
There are a lot of geopolitical issues affecting oil prices, not the least of which is the supply (supposed restriction) from Russia, the potential for new supply from Iran, recession fears, artificial temporary supply from the SPR, etc.

There is a reckoning coming, as new supply is not projected to meet future demand, we are not spending enough on exploration, not to mention the regulatory hurdles on new leases and wells. The SPR releases are actually making up most of the difference in current supply/demand disparity, and that will come to an end.

On the flip side, refiners are literally maxed out on production. There is limited places for new incremental barrels to go. For the next couple of years, the bottleneck appears to be shifting to refining capacity from crude oil supply.

So you can see where there is a price battle here on two different trains of thought, along with the uncertainty of geopolitical and recession issues. I think that's why you haven't seen a return to ATHs, and why oil has cooled off.

If you've read any of my post the past few months, I see much less risk (and more upside) with pure play refiners for the next year or two.

AverageInvestor's avatar
Could it be the market was pricing in a larger calamity in Europe related to the energy switch they needed to make? From what I’ve read Europe has successfully pivoted (at a higher cost) and might not face a disastrous winter.
Scoreboard Investor's avatar
Not sure why energy prices are declining. I do hold $XLE which has performed very well for me. Planning to continue to hold.