We have been energy bears for most of the past decade. That has not changed. I do believe that green energy creation is the future. That said, buying the periods of weakness in the sector offered a good entry location on a sector that basically has dramatically underperformed until recently.
The first chart shows the total return of the State Street Energy Select Sector SPDR ETF (XLE) and iShares S&P/TSX Capped Energy Index ETF (XEG) energy sector ETFs for Canada and the U.S. since the fracking boom hit the US in 2014 (five per cent annual returns and most of that was in recent months).
The anticipation of regime change in Iran has pushed the energy sector much higher in recent weeks. Since the peak of the Russian attack on Ukraine in 2022, the sector has moved sideways for the past three plus years too. It will not likely be different this time for the recent run up in the sector anticipating this current geopolitical event.
Graph The total return of the XLE and XEG energy sector ETFs for Canada and the U.S. since the fracking boom hit the US in 2014
The tragedy of war and the human impact makes it very hard for me to make a call based on what’s causing the moves. It reminds me of trying to give investors advice after Sept. 11 2001.
I said on BNN Bloomberg after Israel was attacked by the Iranian back Hamas on Oct. 7 2023 that it would not end until there was regime change in Iran. This war will not end until radical Islam is removed from leadership in Iran.
Exxon Mobil Corp. is about 25 per cent of XLE and is trading at 22 times earnings. The world simply can’t function well with oil prices over US$100. It seems clear to me that previous spikes in world oil prices hurt global gross domestic product (GDP). I doubt we go back there and I’d bet that peak crude demand on a global basis is closer than many believe. Once we see regime change in Iran along with Venezuela, excess supply should be a major factor. If Canada every builds more pipeline capacity, there is even more.
Tactically, I sold all direct energy exposure today that was added during periods of weakness in recent years. I’m betting that the sector consolidates for the next few years and a global recession in the coming years will be the next best buying opportunity.
