Regarding high-priced oil, we've been here before, asserts Jack Bowers, a specialist in the Fidelity family of funds and editor of Fidelity Monitor & Insight.
In 2020, the pandemic caused oil demand to collapse globally, prompting a 7% reduction in crude production compared to 2019. That may not sound like a big plunge, but the cuts were massive; they effectively erased seven years of supply growth.
Lacking any roadmap for forecasting a rebound, global oil producers raised capital to stay in business and waited for demand to pick up. The alternative, boosting production at a time of low prices, was too risky.
Oil demand came roaring back in 2021, and the surge was too fast and too large for producers to ramp up in tandem, and the result was high prices. Then came Russia’s invasion of Ukraine, and the sanctions that followed.
Not knowing how much of Russia’s oil supply will ultimately be cut off from global markets (their exports accounted for about 8% of global supplies before the war), most major oil companies are sticking to a conservative approach when it comes to boosting output — one that may have the price of crude settling out near the $120 mark.
This would not be new territory as the center of oil’s trading range from early-2011 to mid- 2014 was also around $120. During that 4.5-year period, inflation averaged just under 2%, suggesting that high oil prices alone are not a major inflationary threat. Of course, unemployment back then was higher than it is today.
It seems unlikely that oil prices will remain high for more than four years this time around, even if most of Russia’s oil exports disappear for lack of buyers or shippers. The U.S. shale industry was just getting started in 2011, but it’s now a powerhouse.
At nearly nine million barrels/day, domestic shale oil production exceeded Russian exports in 2021. Plus, North American rig counts have increased by more than 60% over the last year, so output is poised to grow at a healthy clip between now and the end of 2023.
On top of that, fully-electric vehicle sales are surging. This year, Battery Electric Vehicles (cars and trucks without tailpipes are known as BEVs) are expected to account for roughly 5% of all U.S. vehicle sales, 10% of European sales, and nearly 20% of Chinese sales.
While BEVs have yet to make a dent in long-term oil demand, that day is clearly coming. Five years from now, global gasoline demand will be shrinking, and global oil demand will almost certainly have peaked.
With this in mind, we don’t expect to upgrade any of the energy-oriented Select funds (all are currently rated Hold), nor do we plan to include any them in our Select Model portfolio. Instead, we are holding Fidelity Environment and Alternative Energy (FSLEX), a new-age industrials fund of sorts.
Its main focus is companies that are leading the economy’s transition to a low-carbon future. That includes firms helping to green the U.S. electrical grid, which currently produces about 38% of power from non-carbon sources (nuclear, hydro, wind, solar and geothermal).
The fund also aims to hold companies that are electrifying “everything and anything,” which of course includes vehicles. The weighting of Tesla (TSLA) in the fund was 11% as of 1/31/22, giving the Select Model portfolioa market weighting in the stock.)
Over the last five years, this fund has outperformed all traditional energy funds with much less risk. I think it’s a solid bet for doing the same over the next five years.
