Energy prices lift oil and gas stocks, weigh on the economy

·3 min read

Energy prices are soaring in 2021 and oil and gas stocks are the clear winners, but the losers might just turn out to be businesses and consumers.

The energy sector has far outpaced the broader market in 2021. The S&P 500’s energy stocks are up more than 50%, compared with a roughly 20% gain for the overall index. Devon Energy, Marathon Oil and Occidental Petroleum have all more than doubled in value this year.

While energy stocks are reaping the benefits from high demand and lagging supplies, other areas of the economy are having a tougher time coping.

Surging oil and gas prices are adding to broader inflation pressures that are squeezing businesses and driving up costs. A wide range of manufacturers are finding it more costly to ramp up operations as energy costs rise. Airlines are getting hurt by higher jet fuel costs as they try to rebuild profits. Consumers in the U.S. and around the world are facing a tighter squeeze on their wallets from rising energy costs.

Fertilizer maker CF Industries briefly halted operations at two facilities in the U.K. in September because of high natural gas prices. Delta Air Lines CEO Ed Bastian warned investors earlier in October that fuel prices will hurt its ability to remain profitable through the end of the year. It expects a “modest” loss in the fourth quarter.

Consumers are already paying more for goods as companies pass through higher fuel costs, raw materials costs and supply chain disruptions. More worrisome to some analysts is what happens if people have to cut back on spending in order to pay for higher gas and home heating costs. The economic recovery depends on continued consumer spending, but higher energy costs could mean less discretionary spending on services, travel and goods.

“At this point, the U.S. consumer has been able to withstand the rise in energy prices,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors. “However, there is evidence that consumers are turning to credit cards to pay for the rising costs of necessities, including energy.”

The Energy Information Administration expects U.S. households to see a 30% increase in spending on natural gas this winter and 43% more on heating oil. Americans are already getting pinched at the pump, where average gasoline prices are up roughly 56% from a year ago, according to AAA.

Europe is facing a natural gas crisis as winter approaches without enough supply to meet demand. China is also facing shortages and power is already being rationed to industries in certain places and a slowdown in manufacturing there could eventually mean even higher prices for commodities and consumer goods globally.

The disconnect between supply and demand for energy will likely linger, analysts have said. OPEC and other suppliers are still cautious about ramping up oil production and it’s likely too late to boost supplies of natural gas ahead of winter. That will likely continue propping up energy stocks as the economy's big winners.

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