What the Russia Oil Ban Means for Stocks

Crude oil prices continued their relentless rise higher Tuesday after the U.S. announced a Russian oil ban. But market strategists are urging investors not to overreact to the latest inflationary shock.

Recession talk is premature, for one thing. The equity market, while broadly humbled, is hardly broken. And opportunities for outperformance remain, at both the equity and sector level – especially in energy stocks – according to analysts and strategists.

Most importantly, panicking never did any investor any good, anyway.

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"The macroeconomic indicators do not give hope for a quick recovery, compounded by the continuing Russia-Ukraine war," says Kunal Sawhney, CEO of independent equity research firm Kalkine. "However, freaking out at the possibility of a longer period of disruption won't help."

The Russian oil ban, announced last Tuesday by President Joe Biden, includes not just Russian crude, but also liquefied natural gas and coal. Global benchmark Brent crude oil prices broke above $132 a barrel on the news.

Although the ban's effect on the U.S. is expected to be minimal – America imported only about 8% of its crude oil and refined products from Russia last year – it is not merely symbolic. Oil prices are set globally, and average U.S. gas prices are now topping $4.27 a gallon, according to AAA. That's the highest nominal level on record, beating previous highs set in 2008. (Adjusted for inflation, gas set a real all-time high of $5.26 a gallon in July 2008.)

However, as unnerving as the prospect of the worst energy shock in 50 years may be, we're a long way from doomsday, experts say.

"Surging oil prices can't singularly trigger a recession, and it would take more than sky-high energy prices for the consumer impact to become recessionary," notes David Bahnsen, chief investment officer for The Bahnsen Group, a Newport Beach, California- based wealth management firm with more than $3.5 billion in assets under management.

Stock Opportunities From the Russian Oil Ban

Bahnsen adds that opportunities remain in energy stocks even amid their red-hot run. The S&P 500 energy sector is up 42% for the year-to-date vs. a decline of more than 12% for the S&P 500. But Bahnsen says midstream companies, which transport and store oil, can offer attractive returns.

UBS Global Research analyst Brian Reynolds also sees select opportunities in the energy sector. Rising gas prices could hurt oil refiners if they curtail consumer demand, he says. Therefore, the analyst prefers companies that are "closer to the wellhead."

As such, Reynolds top picks include Cheniere Energy (LNG, $139.01), Targa Resources (TRGP, $68.62) and Energy Transfer (ET, $10.34)

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Exploration and production (E&P) companies with "notable" cash flow paying off high-priced debt should likewise benefit from rapidly rising energy prices, says Truist analyst Neal Dingmann. E&P stocks most likely to benefit from that dynamic include Continental Resources (CLR, $60.35), Callon Petroleum (CPE, $60.68) and Occidental Petroleum (OXY, $55.38), among others.

Per OXY, note well that Warren Buffett's Berkshire Hathaway (BRK.B, $322.72) recently bought 91 million shares in Occidental Petroleum worth $5.1 billion.

Taking a broader view, Goldman Sachs strategists recommend investors overweight their exposure to the energy sector, as well as healthcare and profitable technology sector stocks.

However, interesting opportunities can be found all over the market.

For example, Jefferies analyst Stephen Volkmann upgraded shares in Caterpillar (CAT, $196.70) – the world's largest manufacturer of heavy construction and mining equipment – to Buy from Hold on March 8.

"We believe Russia's incursion into Ukraine resets the global economy and will drive pressure for Western nations to seek and secure key mined, energy and agricultural commodities," Volkmann writes. "Additional capacity for mining, oil & gas, LNG, pipelines, etc., will be required, and CAT should be a clear beneficiary of these investments."

But many – and probably most – buy-and-hold investors should just take it easy for now.

Although active investors might want to explore some of the ideas mentioned above, the bulk of retail investors would do well to stick to their long-term plans and goals.

Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA, says that although the risk of an outright recession is "very low" and stock market valuations are "below a sensible" level, it's still "much too early to consider adding to positions."

Bahnsen concurs. After all, there's nothing wrong with being patient while preparing for the market's next move.

"If the stock market declines another 5% to 10%, investors should look to rebalance and use the pullback to add to exposure to the core holdings of their portfolios," Bahnsen says.