Why are Oil Stocks Falling Behind Oil Prices?

(September 10, 2021) Oil prices demonstrated significant growth in 2021, reaching pre-COVID levels as a result of positive expectations about economic recovery. For the same reason, oil stocks also demonstrated strong growth this year, but not to the same extent; the financial results of a number of the world's top oil companies are still not where they were in the pre-COVID-19 period, and energy sector exchange-traded fund prices have yet to reach 2019 levels.

A number of factors are preventing oil stocks from keeping up with oil prices.

• Oil prices rose mostly due to rising costs, not to increased margin. For example, ocean freight rates increased fourfold over the last year. 
• The deficit in the oil market, supported by supply restrictions by OPEC, is expected to turn to a surplus since an agreement to remove all oil and shipping sanctions has been achieved between Iran and the US. 
• The oil sector, like that of other commodities, is pro-cyclical, meaning that it grows when the economy expands as indicated by growing inflation. This is what we saw this summer when US inflation was at its peak. However, the market expects inflation growth to cool down, resulting in the oil sector losing its short-term rising power. 
• Developed countries are making a gradual transition to a green economy. The data on electricity installed capacity demonstrates a growing share of renewable energy in all regions, excluding OPEC. BP forecasts declining oil consumption and growing renewable energy consumption in all scenarios by 2050. OPEC in its forecast predicts that oil demand will start declining in 2040.