Oil prices increase for five consecutive weeks, is it time to allocate investments in the energy sector?

Due to tight supply and strong demand expectations, oil prices have increased for five consecutive weeks, surging to a three-month high. As of July 28, crude oil WTI futures and Brent futures settled at $79.86 and $83.61 a barrel, respectively, hitting the highest since April 19, 2023.

In 2022, the utilities and energy sectors generated record earnings for Buffett's Berkshire Hathaway. Taking advantage of the 2023 commodity price fluctuations, Berkshire has ramped up investment in oil and gas investments. Recently, it further committed $3.3 billion to enhance its ownership percentage in a liquefied natural gas export terminal in Maryland.Besides, Berkshire bolstered its position in Occidental Petroleum Corp. by 15% and procured additional shares from five Japanese commodity traders throughout the year.

The recent surge in oil prices can be attributed to several factors, including:

1) Reduced supply due to Russian and Saudi Arabia's oil output cuts and increased crude oil purchases by the Biden administration for the Strategic Petroleum Reserve.

2) Bullish demand projections for the latter half of 2023: The stronger-than-expected US economy and China's announcement of supportive measures to boost economic growth fueled optimism for an upswing in oil demand.

3) The expectation of a forthcoming cessation of the Fed's rate hikes also contributes to upward pressure on oil prices.

Due to persistent apprehension regarding the energy sector's ESG performance, weak pre-pandemic returns, and potential declining demand for fossil fuels in the future, many investors become disillusioned with the sector. According to Bloomberg, the energy sector is currently traded at a P/E ratio of 7.4, which is the lowest among all sectors in the S&P 500 Index. Nevertheless, it produces the highest level of cash flow per share.