The War in Ukraine is dominating the headlines and captivating our attention, as well it should. It is the world’s newest senseless tragedy… and it threatens to become a much larger one before running its uncertain course.
Nevertheless, the wheels of commerce continue to grind ahead… and the stock market continues to open its doors for business five days a week. So, let’s take a brief look at one the back-page stories: crude oil.
The Rolling Stones of the Market
Most stocks have been struggling to advance since the day Putin’s army rolled into Ukraine, but oil stocks have been one notable exception.
Since early December, when I urged my subscribers to invest in a basket of oil stocks, the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP) has soared nearly 25% — even though the S&P 500 index has slumped about 5% during that timeframe. The option trade I recommended on oil stocks has more than doubled. (To find out more about an options play on this very stock in my The Speculator elite trading service, which is up a stunning 84%, click here.)
I suspect this winning oil trade has a lot more room to run.
Obviously, the invasion of Ukraine “helped” the oil trade, but the price of crude oil was already ramping higher before Putin’s intentions became clear.
As I explained three months ago:
“Everywhere you look, the world is turning away from fossil fuels and turning toward renewable energy technologies. Because of this powerful megatrend, many folks assume oil stocks, and the returns they can deliver, are a thing of the past.
“But oil stocks may not be as passé as most folks assume. Like the Rolling Stones, they probably have a few solid performances left in them…
“To put it simply, the road to a $10-per-barrel oil price might pass through $150, or even $200, on the way.”
Today, the price of crude topped $100 a barrel for the first time in seven years. $150 might not be far away, even if the Ukrainian invasion ends soon.
That’s because the global supply of crude is struggling to keep pace with demand.
According to the widespread narrative, OPEC will open the taps as need to quench global demand. But that narrative is proving false already.
During the last few months, OPEC has not been able to increase supplies as much as “promised” because some of its members like Nigeria and Angola have struggled to boost production.
“Underinvestment” is the Achilles Heel that is hobbling supply growth.
Because so many oil companies around the world have slashed investment in both exploration and production, they cannot boost supplies… no matter how high the oil price soars.
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As I’ve pointed out previously, data from Rystad Energy shows that global investments in oil and gas exploration and production peaked eight years ago and has plummeted about 65% since then.
That’s no way to boost production!
Even though Rystad expects oil-industry investment to increase slightly this year, those efforts will be too little too late to impact near-term supplies. In all likelihood, the supply picture will not improve until after multiple years of increasing investment.
Therefore, the only factor that could “rescue” the oil market and halt crude prices in their tracks would be a sharp drop in demand. That is certainly possible.
The Energy Swan Song Continues Playing
A war on Europe’s eastern periphery, for example, is not the kind of event that would European vacation travel. If tourism tails off, so would crude demand for air travel.
The Ukrainian conflict could also throw cold water on the global economy in general, which would curtail crude demand.
Despite these possibilities, I suspect the crude market deserves the benefit of the doubt… and that oil stocks remain a “buy.”
“What about EVs?” you say. “Won’t they cause crude demand to drop?”
The answer is yes… but not tomorrow.
Currently, more than half of every barrel of crude oil becomes fuel for an internal combustion vehicle. So it makes sense that EVs would reduce net demand for crude… but that day is not likely to arrive any time soon.
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.
In other words, most conventional oil-consuming technologies will die a slow death, no matter how rapidly EVs conquer the personal transportation industry.
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Bottom line: The death of oil is greatly exaggerated, and I expect its price to deliver some upside surprises over the next year or two.
A tightening oil market, coupled with a rising inflationary trend, provides ample reason to add an oil stock to your portfolio, at least as a hedge.
Sincerely,
Eric Fry
P.S. On Thursday, we’re starting a new chapter in Smart Money. Nothing will change to your subscription, but we’re adding an extra element that we all think will add some extra “zest” to your Smart Money experience. Stay tuned!
On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.
