The S&P 500 has struggled so far in 2022, but a combination of energy shortages, booming reopening demand, inflation and geopolitical unrest has oil prices trading at multi-year highs. Oil stocks like Exxon Mobil Corp (NYSE:XOM) and Marathon Oil Corporation (NYSE:MRO) are among the market's best performers year-to-date.
In fact, eight out of the 10 best-performing stocks in the S&P 500 so far in 2022 are oil and gas stocks, including both Exxon and Marathon. WTI crude oil prices are up 26.8% year-to-date and 61.5% overall in the past year.
Related Link: Gas Prices: Why Russia's Invasion Of Ukraine Will Increase Your Costs At The Pump
What's Happening: Reopening demand from the global economy has been a contributing factor, and the drop-off in cases of the omicron variant of COVID-19 could mean that travel demand for crude oil will see a big jump when the spring and summer travel season begins.
Of course, the conflict in Ukraine is another major factor that has pushed crude oil prices above $90 per barrel for the first time since 2014. Russia is the world's second-largest oil producer, and any major sanctions on Russia by the U.S. or other countries could create a major supply imbalance in the global oil industry.
Meanwhile, a large portion of the money being invested in the energy industry in recent years has gone toward developing clean energy technology, which still represents a relatively small part of the global energy supply.
Why It's Important: Rising oil prices increase costs for many companies, but energy demand is certainly good news for oil and gas stocks. Investors should closely monitor oil prices in the coming weeks, especially as the conflict in Ukraine escalates. If elevated oil prices reach a certain tipping point, a so-called oil shock could inflict serious economic damage.
In fact, DataTrek Research co-founder Nicholas Colas recently noted that oil shocks have caused more U.S. economic recessions in the past 50 years than any other catalyst. Investors may remember that crude oil prices spiked as high as $140/barrel prior to the economic crisis in 2008.
Benzinga's Take: For now, oil prices seem to be in a sweet spot for oil and gas companies, contributing to elevated margins without weighing down the economy. It's not obvious at what price rising oil prices would start to meaningfully eat into corporate earnings and slow down the economy, but investors should continue to monitor the situation, especially if oil prices cross over the $100 psychological level.
