Under the energy crisis, should we learn from Buffett to invest in oil and gas stocks? What other investment opportunities are there?

Beginning in July, Russia reduced the total amount of natural gas exported to Europe to 20% in the same period, while the European electricity market pricing mechanism caused electricity prices to be determined indirectly by natural gas prices. Combined with Europe's extreme arid climate, it limited the production of hydropower and nuclear power, making the spot price of electricity in Europe more than five times that of the same period last year.

Europe's HICP continued to rise in August, reaching a record high of 9.1%. Although the Eurozone economy grew by 0.5% and 0.7% month-on-month in the first and second quarters, respectively, Germany's representative economy, which is dominated by manufacturing, has stagnated.

The rise in energy prices brought about by the Russian-Ukrainian problem has left Europe mired in low growth and high inflation. High inflation has also revived the risk of European debt default. So under these risks, are there still investment opportunities that can be grasped? Let's interview Mr. Shanti, ATFX senior market analyst.

——First, what does the energy crisis mean?

The energy crisis refers to continued energy shortages around the world, which affected many countries, especially Europe, after the Russian-Ukrainian war. Demand for natural gas began to rise again as countries began to recover from the pandemic, but gas prices rose in 2021 and continued to rise in 2022 due to supply shortages that could not be met.

——Why is the energy crisis getting worse?

A key question is how Europe will handle its energy crisis after the important pipeline “Nord Stream 1” between Germany and Russia is closed for annual maintenance. Europe's largest economy and other eurozone countries are heavily dependent on gas being transported through this pipeline. Even before the pipeline was shut down for annual maintenance, gas supply through Nord Stream 1 had been cut by more than half, causing supply constraints. According to Goldman Sachs research, this has increased energy costs for European households by 65%, to around 500 euros (512 US dollars) per month. Industries such as chemicals and cement in Germany and Italy may have to cut gas usage by up to 80%. The Eurozone economy is likely to shrink by more than 2% by March 2023.

——As you mentioned, what investment opportunities can still be grasped under the European energy crisis?

Last week, we saw the ECB raise interest rates by 75 basis points to deal with inflation, but this did little to help the euro. The deepening energy crisis has hit the eurozone economy and the euro so hard that the European Central Bank's more aggressive monetary tightening measures have done little to stop the euro from falling. Several economists expect the euro to fall to $0.97 and remain at this level for the next six months, as demand damage caused by the gas crisis will lead to a “deeper and longer contraction.”

The main reason is increasing safe-haven demand, especially for the US dollar. The Chicago Mercantile Exchange's FedWatch tool shows that the US dollar has been rising recently because the financial market expects the Federal Reserve to raise interest rates by at least 75 basis points at the end of next week's policy meeting, and the possibility that the target interest rate will rise sharply by 1 percentage point is 38%.

Furthermore, the Eurozone is almost certain to enter recession, and business activity contracted for the second month in a row in August. Therefore, shorting EURUSD could be an opportunity. Other opportunities exist in the energy sector. In the short term, the energy crisis will not end soon, and rising inflation is the main theme in the financial world. Take the energy sector ETF (XLE) as an example. With oil shares soaring, the fund has risen 48% so far this year.

Since the beginning of this year, Occidental Petroleum (OXY) shares have risen 130%. Warren Buffett recently invested another $16 billion in the Permian energy giant, increasing its shareholding ratio to 26.8%. The stock prices of Chevron (CVX) and ExxonMobil (XOM) have also risen 38% and 59%, respectively, so far this year.

Digital economists expect the industry to continue to thrive as high oil prices and high inflation may boost the industry's performance.

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Mr. Shanti's view is that as the European energy crisis continues, it is possible to short the euro, and energy stocks will have a relatively good market in the future.