Hillcrest Energy Technologies. (CSE: HEAT)
From concept to commercialization, Hillcrest is investing in the development of energy solutions that will power a more sustainable and electrified future.
Since the beginning of the year, the performance of the energy sector in the US stock market has been second only to the telecommunication industry, outpacing even the tech giants. Oil and natural gas stocks have surged by 17% since January, with investors continuing to buy in.
What sets this round of investor interest apart is the rationale behind their investments. In addition to the rise in oil prices, another significant reason for investors to buy oil stocks this time is for inflation hedging, possibly providing another justification why oil is often referred to as ‘black gold.’
In recent weeks, funds have been pouring into US oil stocks, driven by reasons including the sustained increase in oil prices and a stronger-than-expected US economy.
Despite the unexpectedly positive US economic indicators, investor anxiety about the economic outlook remains, leading them to seek protection through increased exposure to oil and natural gas. Some analysts suggest that holding commodities can serve as a good hedge should inflation rates surge again. The latest data shows that the US Consumer Price Index (CPI) rose by 3.5% in March, exceeding expectations, leading to a decrease in expectations for interest rate cuts.
The strong economic data supports predictions of a ‘soft landing’ or even ‘no landing at all,’ which bodes well for oil. However, at the same time, the resurgence of inflation rates suppresses expectations for interest rate cuts, posing a bearish pressure on oil prices. Surprisingly, as oil prices rise, so do oil stocks. If one were to attempt an explanation, it may be because investors are beginning to notice a fundamental fact: oil is a necessity, and even a rise in inflation rates is unlikely to significantly impact the demand.
The exceptional performance of oil and gas companies, and the fervent interest of investors in oil and gas stocks, are not solely reliant on geopolitical factors, but more so on supply and demand dynamics.
Sebastian Barrack, head of commodities at hedge fund Citadel, stated earlier this month that the global oil market is heading towards a state of extreme tightness. Additionally, OPEC has unquestionably regained control, and demand is proving to be more robust than some had anticipated, with Vitol expecting growth at 1.9 million bpd this year.
However, the International Energy Agency (IEA) recently downgraded its demand forecast, yet investor sentiment has not been dampened; rather, it has surged. Market analyst John Kemp of Reuters recently pointed out in a report that portfolio investors’ long speculative positions in gasoline futures and options have reached their highest levels since before the pandemic. The reasons behind these positions closely align with why they are buying energy stocks: they anticipate higher demand than supply for at least the coming few months.
With the arrival of the first-quarter earnings season, the actual performance of oil and gas companies may well confirm investors’ assessments.”
