What Happens to US Energy Stocks After Sanctions on Russian Oil?

NEW DELHI (CoinChapter.com) — It is an interesting period for the US economy as oil sanctions on Russia are days away from going into effect. Here’s how a potential change in oil prices could affect inflation, energy stocks, and even crypto.

EU Applies Sanctions on Russian Oil

In April, 27 countries in the European Union announced oil sanctions on Russia to disrupt its invasion of Ukraine.

However, the parties are yet to come to a final agreement. Moreover, an outright ban would damage energy markets because of high crude oil prices. This led G-7 to consider setting a cap on the amount it would pay for Russian oil.

The final cap is still being deliberated but could be decided before the sanctions go into effect on Dec 5.

In response, Russia has remained nonchalant. Kremlin officials have indicated that the country will choose not to sell oil to those countries that have implemented a price cap. The stance comes amidst hopes that India and China will fill in the gap, both of which remain the largest consumers of Russian oil.

As per the International Energy Agency, Russia is the world’s largest exporter of oil to global markets and the second largest crude oil exporter behind Saudi Arabia.

Energy Stocks Up

Following Russia’s attack on Ukraine in Feb 2022, fears of a decrease in global oil supply have sent prices soaring to new peaks. Between February-May, crude oil futures climbed by nearly 40% to $133.4 – its highest-ever value.

Even though prices corrected over the next few months, crude oil futures were still up by 6% since the beginning of the year.

Energy stocks, which share a positive correlation with oil prices, have benefitted from this increase. As a result, by the end of Q3 2022, energy was the best-performing sector on the S&P 500, offering returns of 30.7%. In comparison, the S&P 500 was down 23.9% for the year.

Analysts project that a few energy stocks are even instead of more than 100% gains in the coming stocks, an expected surge that is uncommon in the stock market.

Correction Incoming?

While the long-term prospects for energy stocks look healthy, the near-term is slightly cloudy. Even though sanctions on Russian oil would increase crude oil prices, many suspect that the energy sector would not reflect these gains.

Research firm SeekingAlpha noted that energy stocks had recently outperformed the oil price itself, which is the underlying commodity. However, it added that such divergences are usually short-lived, following which a correction is observed. Excerpts:

“Should this relationship continue to hold, then there is clear potential for a bit of catch-up or catch-down type move in the coming months… my base case is that these two probably meet somewhere in the middle whereby the stocks correct and the commodity gains”.

Impacts on inflation and personal spending

Meanwhile, expectations of higher oil prices amid Russian sanctions might affect inflation and decrease consumer spending.

Since oil is a key ingredient in petrochemicals used to make plastic, higher oil prices would increase the prices of many products made with plastic. A similar effect would also lead to higher transportation costs. As a result, consumer spending would likely decline.

In March 2022, Federal Reserve Chair Jerome Powell outlined how higher oil prices impact the economy. He said that every $10 per barrel increase in the price of crude oil raises inflation by 0.2% and sets back economic growth by 0.1%.

Notably, the consumer price index, which tracks inflation, jumped by 7.7% year-on-year in October. Even though this was the smallest percentage increase in 12 months, the figure is still at its highest since the early 1980s.

Crypto remains uncertain

While Bitcoin does not share a direct correlation with oil prices, it’s difficult to judge how variations in crude oil prices will affect crypto investors.

However, judging by returns offered by energy stocks and those by Bitcoin, investors may be tempted to cash out of crypto and prioritize their energy investments. Such a development would only add more clout to the fate of crypto, which many say hangs by a thread.

On Dec 2, Bitcoin traded slightly below the $17K mark, down by 0.8% over the last 24 hours. Its year-to-date loss sits around 63.4%, according to MarketWatch.