With national lockdowns off the table and positive data on a vaccine likely imminent, now is a good time to buy the United States Oil Fund ETF (NYSE:USO). Further, in 2021 oil demand is expected to rebound meaningfully, making the USO ETF a very good choice for longer-term investors as well.
Also important to point out is that the Street appears to be overestimating the extent of electric car sales and of the work-from-home trend.
A Vaccine Looks Imminent
I believe that one of the key reasons why oil prices have been rangebound since Labor Day, keeping a lid on the USO ETF, is fear that coronavirus-related lockdowns will be reimposed.
But the World Health Organization, or WHO, recently strongly discouraged countries from imposing such lockdowns. Specifically, the organization stated that “lockdowns are not sustainable solutions because of their significant economic, social & broader health impacts.”
WHO added that “Because of their severe economic, social & broader health impacts, lockdowns need to be limited in duration. They’re best used to prepare for longer-term public health measures.”
Given WHO’s statement, the lack of data supporting the efficacy of lockdowns in preventing deaths, and the widespread popular opposition to lockdowns, I do not expect the U.S., Europe, or large nations in Asia to use them on a national level again.
Instead, there will be temporary restrictions on the number of people who can be together in certain regions and closures of bars, along with limited hours for restaurants.
That’s the approach that’s being employed in France and the U.K., where the pandemic has worsened, at this point. For example, the U.K. is permitting restaurants to stay open, but it’s forcing them to close between 10 p.m. and 5 a.m. in hard-hit regions. In such areas, citizens will also be prohibited from socializing together in groups of seven or larger.
For its part, France has imposed a 9 p.m. curfew in eight cities but does not appear to have implemented widespread closures during the day.
As investors internalize the idea that lockdowns are not going to come back, I believe that oil prices and the USO ETF will climb over the next month or two.
On the vaccine front. Pfizer (NYSE:PFE) has said that it could have data on its shot as early as the end of this month. Moreover, as The New York Times pointed out on Oct. 2, the drug maker has a large financial incentive to make sure that its vaccine is released before competing shots.
Since Pfizer’s vaccine sparked the creation of a meaningful number of antibodies for Covid-19 during early-stage trials and the company has not reported any major safety issues with it, I think there’s an excellent chance that the company will report favorable data for the vaccine.
Finally, because the U.S. government has already intensively prepared to manufacture vaccines, I think that hundreds of thousands of doses of Pfizer’s shot can be quickly made. As a result, I would not be surprised if doses are offered to America’s vulnerable citizens and healthcare workers by the end of November.
Those developments, in turn, should further reduce fears of traveling and the chances of lockdowns. They will also make investors and traders much more optimistic about a vaccine being given to the general population sooner rather than later. As a result, oil prices and the USO ETF are likely to rally starting at the end of this month.
A Positive 2021 Demand Outlook
Last month, the International Energy Agency forecast that the demand for oil would increase by 5.5 million barrels per day. That was an increase from the organization’s previous forecast of a 5.2 million. The IEA also noted that China was making a big comeback. Earlier this month, the organization forecast that the pandemic would likely “be brought under control in 2021,” while energy consumption would return to 2019 levels in 2023, CNBC reported.
Finally, as I’ve stated in previous articles, once the pandemic ends, I expect many more people to work from home than before the crisis, but I do not anticipate that the vast majority of people in the western world will do so. Among the evidence supporting that view is the IEA’s forecast for energy demand to reach pre-crisis levels by 2023 and the fact that very few large companies have announced that they will let all their employees work from home permanently.
As far as electric cars are concerned, EVs are only expected to account for 11% of total vehicle sales in the U.S. in 2026. That means well over 90% of vehicles on the roads will still use gasoline in that year.
Sales of EVs will be much higher in Europe and China, which are both implementing tough carbon-reduction requirements. Still, the lion’s share of vehicles on the roads for the next decade in the EU and China will be powered by gasoline as well. That’s likely why the IEA doesn’t expect global oil demand to peak until 2030.
I think that oil prices have stayed very low partially because investors are giving too much weight to the work-from-home and EV trends.
The Bottom Line on the USO ETF
Once fear of lockdowns ease and positive data on Pfizer’s vaccine is announced, the USO ETF should rally. Over the longer term, the likely increase in oil demand in 2021 and the realization that the Street is exaggerating the impact of EVs and WFH should push the ETF still higher.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.