Dear Investor,

Do not believe rumors that the price of crude oil has stopped climbing. Nearly unstoppable supply-and-demand forces point to continued gains for energy stocks – a trend that cannot be controlled by words from the Federal Reserve or other government authorities.

So if your portfolio doesn’t have enough exposure to the energy sector, here are a few ideas.

Since the start of 2021, the WTI crude oil price has climbed from $50 per barrel to a current price of near $90. In November 2021, WTI dropped from $80 down to $66, giving investors a head-fake that energy prices had peaked.

Wrong.

Over just the last two months, oil climbed by $25 per barrel. These gains came during the winter season, which is historically when oil prices fall.

Over the long term, it is impossible to manipulate energy prices. Humans consume roughly 100 million barrels of oil per day – a similar amount to what global energy companies produce.

Because of this, there is very little slack in the crude oil supply and demand system. The price of oil changes when the balance changes.

For example, the pandemic severely restricted economic activity and energy usage. As a result, oil crashed in 2020. Because of the low prices, oil producers cut back on production.

Coming out of the early 2020 economic slowdown, energy demand recovered much faster than experts predicted.

It takes producers much longer to ramp up increased production on the supply side, assuming they want to make the capital investments at all. Government policies, especially from the Biden administration, continue to highly discourage investment in new oil production.

Oil producers cannot quickly ramp up production. It takes large amounts of money, government permits, and many months to increase production meaningfully.

In short, energy demand will continue to grow quickly as the pandemic moves further into the past. Crude oil production will not increase nearly as fast as demand grows. That’s basic economics for higher oil prices.

Upstream energy producers – sometimes referred to as exploration and production companies – will be the primary beneficiaries of higher crude oil prices. Share prices in this sector are positioned to go higher accordingly.

The last reported earnings were for the 2021 third quarter. WTI crude averaged about $70 per barrel for the quarter. Reported Q3 profits were excellent. In the next few weeks, 2021 fourth-quarter earnings will be released. For Q4, WTI averaged $77 per barrel. Investors will be greatly surprised at the profits.

Now, for the first quarter of 2022, it seems likely that WTI will average close to $90 per barrel or higher. Those results will be posted in April and May.

Exploration and production energy companies have at least a six-month runway of higher prices and profits. That’s a minimum, and it could take a lot longer for supply and demand to reverse and push crude prices lower.

The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and iShares U.S. Oil & Gas Exploration & Production ETF (IEO) are two investments to play higher oil prices.

Pro tip: If you prefer individual stocks (as I do), research the top holdings of these funds for stocks to add to your portfolio.

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