When Russia invaded Ukraine in late February, the price of oil was just over $90 a barrel.
Basically, it went straight to over $120 a barrel in about a week and a half.
Gasoline prices have also risen rapidly, reaching over $5 a gallon at the start of the summer.
The energy picture looked bleak at the time and it seemed like it was only a matter of time until we broke all-time highs in energy prices.
Watch all the headlines from March this year:
We spent the entire 2010s underinvesting in our energy infrastructure, and then one of the world’s most important sources of energy was cut off because of the war.
Things looked bleak given that inflation was already at its highest level in four decades.
I specifically remember listening to an Odd Lots podcast in March that laid out the case for oil at $200 a barrel in March when tensions were high:
Tracy: I mean, how far do you think it could go? And how worrying would you be in terms of demand destruction?
Rock : Well, I think, like almost $200 a barrel – so much higher than today. I feel like there is no demand destruction at $110 a barrel and we will have to go much higher before demand can come down enough. But it also assumes there’s no government mandate and some kind of lockdown, where say two days a month, we don’t do anything. And we are in confinement two days a month. I mean, there could be solutions like that to bring the demand down, but if there’s no government mandate, then I think about $200 worth of oil will be enough to bring the demand to balance the market.
Joe: Could we see $200 oil this year?
Rock : Yes, I think so. Yes.
It was sure it was only a matter of time.
However, the opposite happened.
Oil prices have crashed since those highs in March.
Here is a story from Reuters this week on the current situation:
Oil prices fell near their lowest level this year on Monday as street protests against strict COVID-19 restrictions in China, the world’s largest crude importer, fueled concerns about the outlook for the fuel request.
Brent crude fell $2.67, or 3.1%, to trade at $80.96 a barrel at 1330 GMT, after plunging more than 3% to $80.61 earlier in the session for its lowest level since January 4.
U.S. West Texas Intermediate (WTI) crude slid $2.09, or 2.7%, to $74.19 after hitting its lowest since Dec. 22 last year at $73.60.
Both benchmarks, which hit 10-month lows last week, posted three consecutive weekly declines.
Not only are oil prices lower than they were before war broke out in Ukraine, but they are basically stable over the year:
I mention this so as not to dunk on these predictions.1
These predictions all made sense given the information we had at the time.
This year is full of surprising results in the markets, but this one might be the most surprising to me.
And the craziest thing is that it’s hard to find a good reason for oil prices to drop so much.
Of course, the White House released the Strategic Oil Reserves and China continues to have its Covid lockdowns. Perhaps the market is planning to demand the destruction of a possible recession. Or maybe the cure for high prices was high prices?
It certainly does not appear that there was an obvious catalyst for the rise in oil prices to reverse.
The tricky thing about markets is that you could be absolutely right on geopolitics and wrong on price action.
Or you could be absolutely right on the macro and still be wrong on the price action.
For example, let’s say I told you before the start of the year that oil prices would be stable until the end of November.
How do you think energy stocks would fare in this situation?
I guess energy actions2 don’t need higher oil prices to outperform:
Energy is by far the best performing sector in the S&P 500 this year and there is no close second place.3
Markets are full of contradictions, surprises, overreactions, underreactions and puzzle moves.
It’s always been that way, but the more I learn about the markets, the more I realize how difficult they can be.
Humility should be your default setting when trying to figure out what’s next.
Markets are tough: Seth Klarman edition
1And who knows, maybe we’ll see $200 a barrel again for another reason.
2My guess as to why energy stocks are doing so well as oil prices have crashed is two-fold: (1) Energy stocks have been crushed for years before the past 18 or so months and (2) It seems like investors are now realizing the importance of this sector in the future, so they have pushed up stock prices. I may be wrong.
3In fact, energy is the only positive sector for the year. At the time of this writing, the second best performer is Core Consumption, which is down about 20 basis points. Utilities, healthcare and industrials stocks also held up well, all down less than 5% over the year.
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