Stocks are down. Tech is especially getting crushed.
But oil, man, oil is on freakin’ fire!
The U.S. crude oil benchmark soared above $90 a barrel this past week. That’s a new seven-year high.
And despite all the love electric vehicles (EVs) and renewable energies are receiving, we’re nowhere near the end of oil.
According to ETF.com:
Oil may be fading away, but it will be a very slow fade … As long as oil is with us, it will continue to have value and be the highly cyclical commodity it has always been — from boom to bust and back again.
Well, guess what? The “boom” phase is upon us.
But some Wall Street chinwaggers are trotting out to say “the top is in.”
Now, they say they’re going to short the oil market.
Oh, really? ...
Funny, I don’t remember them turning bullish on oil like I did in October.
You’ll recall that the prices of oil started blasting off in November. The rest is history.
And if you acted on the recommendation I talked about in my October column on oil, the iShares U.S. energy ETF (IYE) …
- You’d currently be up about 26.7%.
That’s compared to a 3% gain in the S&P 500 over the same time frame.
Not bad for a three-month gain.
So, am I going to join Wall Street’s chorus of mediocrity and say, “grab those gains?”
Like hell I am!
While locking in half gains is a smart thing to do — I just recommended to my Wealth Megatrends subscribers to bank about 65% gains on half of an oil position — because I don’t think oil is done.
- There are powerful forces lining up to push crude higher, and I aim to keep riding that wave.
Particularly, I see three of them factoring in.
Force No.1: OPEC+ Peters Out at the Pump
Despite raising its production quotas by 400,000 barrels a month, OPEC+ is pumping BELOW its own targets.
In fact, actual OPEC+ production in December was 790,000 barrels per day (bpd) below target. The higher OPEC+ raises its target, the more likely it is to fall behind.
The reason is because the quotas are political. Most of the OPEC+ nations don’t have spare capacity to turn on.
- About 45% of its spare capacity is in Saudi Arabia and around 25% is in United Arab Emirates.
And the rest of OPEC+ aren’t going to let those two have all the fun.
This is having an impact on the market. Robert Yawger, director of energy futures at Mizuho (MFG), recently wrote that “Failure by OPEC+ to deliver on the monthly 400,000 production increase has actually become a bullish factor in the recent rally.”
Force No. 2: Economic Boom
The U.S. economy grew at a 6.9% annual rate in the fourth quarter – the strongest growth in years … and global gross domestic product (GDP) is growing at a 5.9% rate.
- When you have economic growth, you have increased energy demand.
Sure, the Fed is about to raise interest rates, and many on Wall Street worry this will hamstring economic growth.
I think the Fed is more worried about that than most and will act very carefully NOT to kill the economy.
Force No. 3: Stockpiles Are Dropping
U.S. crude oil stockpiles unexpectedly dropped in the past week. However, they’ve been scraping bottom for a while.
In fact, U.S. crude oil stockpiles are currently 9% BELOW the five-year average range.
And it’s not just America.
Recently, Morgan Stanley (MS) calculated that observable crude oil inventories globally shed some 690 million barrels in 2021 and were now at the lowest in more than five years.
Well, we can just pump more, right?
Nope.
Corporate investment in new oil and gas development is falling fast, as shareholders get sick of the feast or famine cycles and are looking for a better return on capital.
The Wall Street Journal reports:
Many drillers say they will never return to pre-pandemic production growth levels of up to 30% a year, in part due to rising costs for raw materials and labor, a lack of available financing and the enormous number of new wells it would require.
In fact, U.S. oil production is running about 11.5 million barrels a day, well below its high in early 2020 of about 13 million barrels a day. A recent study forecast that …
- It will take AT LEAST until 2023 before America’s total oil production reaches pre-pandemic levels.
Around the world, the oil industry is having problems keeping up with demand. And that points the way to higher oil prices.
So, is it time to take profits in your oil company shares?
No. Make that, hell no!
What Could Upset the Oil Cart?
Something could go wrong, for sure. OPEC+’s supply agreements could break down, and Saudi Arabia and the UAE could start pumping at breakneck speed.
I think a more likely risk is that oil prices get so high, consumers change their behavior and use less gasoline.
But with retail gas prices at the highest level since 2014, we’ve seen no sign of a slowdown yet.
Part of it is that wages are rising, up 5.7% in the past year. That’s the biggest increase in decades, and more fuel for an economic boom.
In fact, it sure looks like oil is on its way to $100 per barrel or higher.
- I’m working with a target of $136 per barrel in the next year.
I’ll reassess when we get there.
So, even with risks in mind, you can still buy oil stocks on any pullback. The iShares U.S. energy ETF (IYE) is a great place to start.
Or you can drill down to the better stocks held by that fund for potential outperformance.
Either way, always remember to conduct your own due diligence before buying anything.
All the best,
Sean
P.S. If you’re interested in another sector on the precipice of a boom, you should tune in to my next MoneyShow presentation on cannabis.
It’s on Tuesday, Feb. 8, at 12:55 p.m. Eastern. And you can register for FREE!
Be sure to sign up HERE.
