Is It Time to Buy Energy Stocks?

Elizabeth Laprade, CFA

Senior Research Analyst

This week’s reader question: With oil prices spiking, is now the time to bulk up on energy sector stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company.?

The price of crude oil has reached its highest level in more than a decade, leading to sticker shock at the gas pump. We also saw energy sector stocks, which popped 27% year-to-date, rise another 5% in the aftermath of Russia’s invasion of Ukraine.

So, is now the time to fill up on energy shares? That depends on your time horizon. Energy could be a logical buy in the very short term if further supply disruption comes to fruition. But in the longer term, I’d be wary.

As one of the largest energy producers in the world, Russia controls the oil and gas pipeline into many countries across Europe. And if Putin decides to fight back against sanctions, withholding supply may be his economic weapon of choice—which is likely to further spike prices. We’ve seen some anticipation of that, with crude oil prices up 34% year-to-date and barrel prices jumping to a five-year high, above $100 a barrel.

However, there’s a lot we don’t know, and uncertainty often stokes fear-based trading. With elevated prices, energy stocks and commodity futures could sell off as traders take profits. The sector is already coming off a huge jump last year, surpassing pre-pandemic levels. Never underestimate the trading whims that blow through commodity markets.

Also, keep in mind that there are valid reasons energy exposure in the S&P 500 has shrunk so significantly over the last few decades—from 25% in the ’80s to less than 4% today. Price volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in., low returns on invested capital, and ongoing supply and demand issues have all hurt oil producers. More recently (and maybe most importantly), so have environment, social and governance (ESG) concerns and the move to renewable energy. With fears that Russia will use oil and gas as a form of control, the push for renewables can only intensify, leading to longer-term headwinds for traditional energy companies down the line.

I’m not saying never buy energy, but beware that this potentially attractive short-term trade may be much less rewarding for long-term investors.

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