Oil headed much higher
Abraham George Macro View
Understanding where we are in the energy markets is very important for all of us. Major economies all around the world have been talking about a move to clean energy for decades and they have been working towards it.
One of the biggest focus and priority for the present US administration will be “to stop the worst consequences of climate change”. Like ‘America First’, confronting China on trade issues and technology issues was a priority for President Trump, Green revolution and building back relationships with former American allies will be important for President Biden.
Most auto companies have kept a 15 year target in phasing out gas and diesel powered cars as a priority. General Motors made a clear statement that it plans to stop making cars with gas and diesel by 2035.
While each major auto companies have set a definitive target date to move into electric cars, the current US administration wants to stop the worst consequences of climate change in the next nine years. That’s a very precise and aggressive timeline, which means we can expect some radical change.
What this will also mean is there will be increased regulation and choking off funding to oil and gas exploration.
What will all this do to current prices in oil and gas? Gas powered cars will dwindle away over time. It is a given and there is no turning back on renewable technologies. But it’s not going to happen overnight. Instead, demand for gas and other oil products is likely to rise much higher before it eventually falls.
Oil demand is coming off a low base from 2020. Oil demand took a massive hit last year thanks to COVID-19 and the related shutdowns around the world. Oil demand tanked with fewer people traveling or commuting around the world.
OPEC, which represents many of the world’s major oil-producing regions, estimates that oil demand fell by 10% in 2020. That’s a drop of 10 million barrels per day.
The short term headwinds for demand will disappear soon as the vaccine becomes available to all.
With demand rising and oil supply shrinking, it should create a much better scenario for higher oil prices in the short term.
So far the kind of strong uptrend is very impressive. The recent rise has broken above a 52-week high. Yesterday oil traded above $60. That’s up 64% since Election day. As oil prices crossed $60 yesterday, the 10 year yield traded to 1.3%. This is the highest level the benchmark rate for markets have traded since February of last year (pre- pandemic). To throw some caution to the wind, the speed of the recovery in interest rates will be detrimental to the equity markets.
With no new big investments into new wells and exploration, existing oil producers, onfield-services companies and similar businesses should benefit from a booming oil market.
Think a multiyear bull market in oil is underway and buying a basket of oil related stocks will lead to big gains. The best way to capture this will be to buy a basket of oil related stocks that can lead to good gains. The Energy Select Sector SPDR Fund (XLE) will be an easy choice. Think it holds the correct mix of companies to capture this ongoing opportunity.
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.
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