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Opinion: Sell ExxonMobil and other energy stocks before these headwinds hit prices again

Energy stocks have been the star investment this year. Now is the time to sell them and electrify your portfolio before investors once again focus on the industry’s long-term headwinds.

There are a host of headwinds that threaten the surge: the rising recession risk, consumer backlash from high gasoline prices and the push to electrify our economy.

The stock market is beginning to realize this.

Energy Select Sector SPDR ETF XLE,
-3.48%
Oil prices have surged 66% since the start of the year on June 8 as Russia’s February invasion of Ukraine combined with rising demand from the global economy’s recovery from Covid sent oil prices to unimaginable highs.

West Texas Intermediate CL.1,
+0.03%,
The US benchmark for oil prices hit a 52-week high of $123.70 on March 8 and is still trading above $110. By comparison, in the four years leading up to the 2020 COVID pandemic, oil prices typically traded between $50 and $70 per barrel.

However, since June 8, the ETF has slipped nearly 20%, a traditional marker of a bear market.

There are three reasons to lock in your profits now:

Risk of recession is increasing

The Federal Reserve has been raising interest rates and shrinking its balance sheet in an effort to tame inflation — driven in large part by rising fuel prices.

The result can be recession. And that doesn’t bode well for oil prices, which have historically been quite sensitive to recessions, or for stocks of energy companies whose dividends rise with oil prices.

All recent recessions have coincided with a significant and sudden drop in crude oil prices, including the 2000 tech bubble, the September 11 attacks, the 2008 Great Recession, and the 2020 pandemic.

Oil prices have cooled in recent weeks, and given the risk of a recession, that trend could intensify. Some investors and stock market strategists, including ARK Invest CEO Kathy Wood, believe we’re already in a recession.

Destruction of demand

With oil prices this high, there are signs of consumer backsliding, resulting in demand destruction for oil. This is bad for oil companies’ profits.

According to the US Energy Information Administration, gasoline demand for the four weeks through June 10, 2022 fell to 9.016 million barrels per day, down from 9.116 million barrels per day a year earlier.

The national average for a gallon of gas is $4.88 a gallon, compared to $3.099 a year ago, according to AAA.

Market forces are at work. Yes, there is a limit to how much consumers will pay for gasoline.

Electrification of our economy

It’s no secret that electric vehicles are at the center of our global energy transition. Still, this is fueling concerns about peak oil demand and, more worrisome for investors, peak oil profits.

Consumers are putting their money where their mouth is by buying electric vehicles. According to the International Energy Agency, global sales of electric vehicles will reach a record 6.6 million vehicles in 2021. And 52% of consumers who plan to buy a car in the next two years intend to buy an electric or hybrid vehicle, according to an EY study released in May.

Switching to an electric vehicle will permanently reduce the demand for oil. Less demand means less oil sales. That means lower returns for oil stocks. duration

While this isn’t news, it’s important to recognize the unique moment stocks are facing now: a once-in-a-lifetime confluence of events where the stock market takes a break from prices and instead focuses on long-term headwinds from the energy sector. On short-term upward accelerations. It’s no surprise that this has elevated stock prices for the energy sector — prices we may not see again.

Take Exxon Mobil XOM,
-3.69%.
The stock closed at a record $105.57 on June 8, surpassing the stock’s previous high in May 2014. With Exxon Mobil down about 15% since that new record, the stock is still up 46% year-to-date.

Now is a prudent time for investors to sell their oil and energy stocks before the geopolitical and Covid-driven oil price bounce fades.

There’s an old adage on Wall Street that suggests you do no harm by taking profits.

Electrifying your portfolio

In our view, investors should avoid fossil fuel-based companies altogether and create diversified portfolios that incorporate electrification such as solar panels, wind power, electric vehicles and batteries, all of which are scaling exponentially.

But beware: some companies that appear “green” still have revenues for the fossil fuel industry. Instead, consider holding stocks and funds No Revenue streams that serve the fossil fuel industry.

Household names like Tesla TSLA,
-1.79%
and Neo NIO,
-2.24%
To fit this criteria, there are plenty of under-the-radar names like ABB ABB,
+0.04%

ABB,
-0.25%

ABBN,
-1.34%,
WESCO INTERNATIONAL WCC,
-2.59%
and Ideanomics IDEX,
-2.99%
It plays an important role in the development and maintenance of power-grid infrastructure.

Zach Stein is the co-founder and chief investment officer of Carbon Collective, a climate-focused investment advisory firm.

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