Everyone likes an underdog story. We love rooting for the unlikely hero…the victor we never imagined could actually win.
That’s where we are with oil right now.
As I mentioned at the beginning of the year, Energy’s Swan Song is one of my Power Trends for 2022.
On Jan. 19, I said:
“No matter how “doomed” crude oil may be over the long term, it could deliver some spectacular short-term gains.
“In the here and now, demand for oil during the last several months has been rebounding sharply. As it continues to rebound, it could reach about 104 million barrels per day (MBPD), which would be about two MBPD higher than the world’s oil producers have ever supplied to the market…
“[Therefore] a tightening oil market, coupled with a rising inflationary trend, provides ample reason to expect oil stocks to deliver market-beating results in 2022.”
Let’s examine some additional bullish influences — first by de-mythologizing part of the narrative about how electric vehicles will destroy oil demand.
The Case for Oil
Today, more than half of every barrel of crude oil becomes fuel for an internal combustion vehicle. So, it makes sense that electric vehicles (EVs) would reduce net demand for crude… eventually. But that day is not likely to arrive any time soon.
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Even though EVs will capture a growing share of the global auto market, the total auto market will continue to grow larger. That means the number of gas-powered automobiles on the road will continue to increase for several more years. The U.S. Energy Information Administration says the total number of internal combustion vehicles on the world’s roads will not peak until 2038.
Meanwhile, because crude demand from other end users will continue growing past that date, the International Energy Agency (IEA) expects worldwide oil demand to be at least 25% higher in 2050 than it is today. That’s the IEA’s “reference case” scenario. Under alternative scenarios, the IEA says worldwide crude demand could top a whopping 150 million barrels per day (MBPD) — or about 50% above current levels.
In other words, most conventional, oil-consuming technologies will die a slow death, no matter how rapidly EVs conquer the personal transportation industry.
Furthermore, renewable energy is not oil-free energy.
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Producing an EV, for example, requires about twice as much energy as producing an internal combustion engine vehicle. This differential results mostly from battery production, which uses a lot of energy to extract and refine metals like copper and nickel.
A green energy fairy doesn’t simply drop these metals on the doorstep of EV manufacturers every night. Instead, great big gas-guzzling and/or coal-fired equipment like earth-movers, conveyors, processing plants, container ships, port-cranes, alloy fabricators and big-rig trucks combine to do the dirty job of converting hunks of ore into battery-grade alloys… and transporting these essential metals from their source to their end users. With few exceptions, every step of the process consumes some form of fossil fuel.
Put simply, the death of oil is greatly exaggerated… and I expect its price to deliver some upside surprises over the next year or two. However, most energy sector experts are taking the other side of that trade. They are expecting the oil price to tread water, at best, in 2022.
But, as I said before, short-term gains are possible. For example, the oil ETF I recommended for my Fry’s Investment Report trading service is up 12% year to date… meanwhile EV titan Tesla (NASDAQ:TSLA) is down a whopping 22%.
The Case for Covid-19’s Effect
Admittedly, none of the current supply-demand statistics prove that the oil price must move higher; they simply highlight that potential. Neat and tidy projections from current supply-demand trends sometimes become very messy and different in the real world. One single variable could throw off the entire projection.
Omicron is an obvious example. We’re still well into the thick of this wave, and although this variant is considerably less virulent than previous ones, we are a long way off from the pandemic ending.
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However, if the Covid-19 pandemic appears to be exhausting itself, which we all hope for — instead of exhausting the worldwide population with an endless series of lockdowns — the global economy could launch into a powerful new boom that could provide an equally powerful tailwind to certain portions of the stock market.
Bottom line: A tightening oil market, coupled with a rising inflationary trend, provides ample reason to be bullish on oil in the short term.
Eric Fry
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On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. In fact, Eric has recommended 41 different 1,000%+ stock market winners in his career. Plus, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a contest. And today he’s revealing his next potential 1,000% winner for free, right here.
