Must-know: Why oil prices are surging on political tensions
As I write in my new weekly commentary, there are a couple of reasons that, despite the surge in domestic production, oil prices have reverted back to the upper-end of a multi-year trading range:
- Ukraine. Most recently, oil traders have become increasingly nervous over events in Ukraine. While equity investors have largely shrugged off the crisis, oil traders are reasonably concerned that escalating violence could lead to a series of tit-for-tat sanctions that could impact Russian oil production or, at the very least, exports.
- Falling non-U.S. production. Not all the factors pushing up oil prices are recent. Beyond the events in Russia and Ukraine, oil prices are elevated partly due to falling production throughout much of the Middle-East and Africa. For several years now, production has been falling in Libya, Nigeria and South Sudan, mostly due to terrorism and political instability.
Libya is a good example. Production quickly surged to 1.7 million barrels per day in the aftermath of the overthrow of Muammar Gaddafi. But thanks to more recent continued unrest, production has since slipped back to barely 250,000. As oil is a global market, reduced supply in Africa and the Middle East has been offsetting some of the surge in U.S. production.
The elevation in oil prices is one factor that has helped energy stocks outperform in 2014. Year-to-date, U.S. energy stocks are up more than 4% as measured by the S&P 500 Energy Sector, versus a gain of roughly 1% for the broader market as represented by the S&P 500.
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Market Realist − Year-to-date, the energy sector has outperformed the S&P500 as a whole. Rising oil prices have helped strengthen the energy sector, which remains bullish for investors. As long as oil prices stay elevated, an increase in this sector should benefit your portfolio performance.
Read on to find out why rising oil prices should continue to fuel outperforming energy stocks and what you should do to capitalize on these gains.