Warren Buffett just made an even bigger bet on oil prices

In the middle of the first quarter, the company of Warren Buffett, Berkshire Hathaway (BRK.A -2.94%) (BRK.B -2.55%)had to reveal that he made a big bet on western oil (OXY -3.40%). That’s because giant conglomerate Buffett had taken a stake that exceeded 10% of Occidental’s stock, prompting a disclosure.

This purchase in Occidental, which appeared to be a leveraged bet on rising oil prices, seemed to indicate that Buffett was bullish on oil prices following Russia’s invasion of Ukraine. But it could also be due to factors unique to Occidental.

It turns out that Buffett was making an even bigger bet on oil prices at the time, the magnitude of which he didn’t have to disclose until now.

Chevron is now in the top three for Berkshire, ahead of AmEx and Coke

While Berkshire had to disclose its position in Occidental, it didn’t have to for a huge increase in its position in Chevron (CLC -3.16%). Because Chevron is a much larger overall company, Berkshire was able to increase its share of the business from 2% at the end of Q4 2021 to 8.9% at the end of Q1 2022.

Thanks to rising oil prices and the rise in the price of Chevron, the stake has now surpassed Buffett’s famous long-running stakes. American Express and Coca Cola in terms of size. At today’s prices, Chevron now represents 7.7% of Berkshire’s $353 billion portfolio, its third position behind Apple first and Bank of America.

Combined with Occidental’s 2.1% allocation, Buffett has now bet 9.8% of Berkshire’s public equity portfolio on these two oil and gas producers. This is more than double the energy allocation in the S&P500at only 3.86%.

Image source: Getty Images.

Ukraine and the Wall Street “casino” allowed the purchase

Buffett has been somewhat bullish on the oil and gas sector for the past two years, buying his original stake in Chevron in late 2020 and acquiring the natural gas assets of Dominion Energy (D -2.66%) in mid-2020. These followed a preferred stock investment in Occidental in 2019, which helped fund the company’s acquisition of Anadarko.

Buffett probably liked the prices at which he could buy these assets. Investors focused on environmental, social and governance (ESG) issues are shying away from traditional energy stocks, and exploration and production companies have limited their investments over the past decade of low energy prices. Thus, the traditional energy sector had likely become the type of value investing Buffett sought.

Given the aggressive pace of buying, it appears Russia’s invasion of Ukraine spurred Buffett’s decision to act big and fast. Berkshire can’t normally buy that many shares that quickly, even if it wanted to, because it buys such large shares.

However, Buffett lamented the more “casino” nature of modern markets that allowed Berkshire to buy such a big stake so quickly. Since so much of Occidental is locked into index funds, Buffett was even more surprised that he could buy so much of the company in such a short time. While that was good for Berkshire, Buffett lamented that the purchase was even possible. Speaking to CNBC at Berkshire’s annual meeting of shareholders on Saturday, he said:

It is not an investment. You don’t buy [investors]. I find that just amazing. You couldn’t do that with Berkshire. … The overwhelming majority of large American corporations have become poker chips. … This allowed us, in two weeks, to buy 14% of a company that has been around for decades. … imagine trying to [buy] 14% of the farms in this country, 14% of the apartment buildings, 14% of the car dealerships, or whatever, when already 40% were locked up elsewhere. It defies anything Charlie and I have seen, and we’ve seen a lot.

Is the oil trade over or just beginning?

Some might think that Berkshire is buying oil stocks near the top of the energy market. After all, oil prices have doubled since the start of 2021, and Buffett was buying higher. Additionally, fears of a recession later this year or next are now widespread, which could hurt oil demand. The number of American rigs is also increasing, which should restore supply later this year, and the government is even releasing 1 million barrels of oil per day for the next six months from the strategic petroleum reserve.

On the other hand, Europe is now considering a faster than expected embargo on Russian oil due to its atrocities in Ukraine. Additionally, China’s COVID-19 lockdowns may be lifted in the near future, around the same time as the summer highway travel season in the United States. at least stability at these high levels) for the foreseeable future.

Either way, Buffett tends to take a longer-term view of these things. More likely, he sees a structural supply shortfall over the next decade and sees high oil company dividends as sustainable. To justify his initial preferred stock financing of Occidental in 2019, he admitted that the financing was a bet on rising oil prices over the long term. Given an even more favorable setup today, that view likely hasn’t changed.

Individual investors must make their own decisions regarding their allocation to traditional energy. However, the transition to clean energy will not happen overnight. As long as the world uses fossil fuels, there will be a need for traditional energy companies. Those not exposed should take note of Buffett’s recent bet.

Steve R. Hansen