Is It Time to Buy Oil?

We just saw oil surge as much as 4.1% in one day to a two-month high.

This fact leads to two questions: First, why is oil up, and second, should you be buying oil and energy stocks?

I’ll skip the TL;DR (that’s “too long; didn’t read” for anyone not up on their internet acronyms) and just say my answer for the second question is a qualified “yes.”

I’ll explain why … and give you a pick packed with “oomph”. But before I do, let me answer the first question.

Firstly, there’s the news from Pfizer Inc. (NYSE: PFE) that they’re working on a vaccine for COVID-19, one with a 90% effectiveness rate. This is giving investors light at the end of the tunnel — a potential end to the pandemic.

So what if it’s going to take “many months” to roll out a vaccine to everybody? The market hears “vaccine” and goes “buy-buy-buy.”

And we also got bullish news from the American Petroleum Institute. It reported drawdowns of over 5 million barrels each for both crude and distillate inventories.

More Bullish News

Do you want more bullish news for oil?

On Tuesday, the EIA issued its new forecast for U.S. crude oil production. That’s now expected to fall by 860,000 bpd this year to 11.39 million bpd. Its previous forecast was for a drop of 800,000 bpd.

Less supply usually means higher prices.

Looking forward, U.S. oil production should fall even more. The EIA now expects it to fall to 11 million bpd in the second quarter of next year. The EIA then expects drilling activity to boost production to 11.3 million bpd in the fourth quarter of 2021.


 

For all of next year, U.S. crude oil output is forecast to fall by 290,000 bpd.

Again, less supply usually means higher prices.

Also, the EIA expects global oil consumption to fall 8.6 million bpd this year, before increasing by 5.9 million bpd in 2021. That sure LOOKS like we’re hitting a bottom in demand.

But I haven’t told you the most bullish news yet: Traders are pricing in much higher prices for oil in the future.

Contango-a-Go-Go!

Futures contracts for oil in the future usually sell for more than front-month contracts. That’s because you get paid for the risk of holding the contract over time; it’s called contango. Right now, the amount that traders are willing to pay for longer-dated oil futures are soaring.

The June 2021 Brent oil contract is now trading at about 55 cents a barrel below December 2021. Late last week, it was at a $1.35 discount, according to Bloomberg.

For the U.S. oil benchmark, the gap in price between December West Texas Intermediate futures for 2021 and 2022 also reached the thinnest since March.

What this tells us is that the market is becoming much more optimistic about the price of crude starting around the middle of next year.

Even further down the road, JPMorgan Chase & Co. (NYSE: JPM) says it anticipates global oil demand will surpass its pre-COVID-19 levels in December of next year.

When Is Bearish News Not Bearish?

Now, there’re three pieces of news I think are bearish, but the market disagrees with me.

First, the Department of Energy now expects U.S. consumption to decline 2.38 million bpd to 18.16 million bpd this year. That’s a bigger drop than previous estimates.

Second, the recovery in global fuel demand is flattening out.


 

This line is an average. If we go by individual region, the recovery in U.S. demand was already lagging that of Europe, India and China. Now, everyone is flattening.

Again, that sounds bearish. But the market doesn’t care.

Third, the Organization of Petroleum Exporting Countries (OPEC) has slashed forecasts for the amount of crude it needs this quarter, down 960,000 barrels per day (bpd) to 26.51 million bpd. This is at least the third time OPEC has slashed that forecast this month.

And this comes even though OPEC is already pumping 2.1 million barrels a day less than it says is needed. In other words, the cartel is not seeing surplus oil stockpiles go down … at all.

I would see that as bearish — OPEC can’t sell the oil it already has. But the market views this as bullish because it means OPEC will be pumping less.

By the way, the cartel is currently keeping about 7.7 million barrels a day offline. That’s roughly 8% of global output.

Here’s the thing: When the market sees “bad” news as bullish news, that’s usually VERY bullish. And I’ve just told you three bearish things the market is brushing off.

So, here’s the bottom line: Despite some bearish news — in the short term, anyway — the market is viewing things as very bullish. You might consider riding this wave.

You could buy individual stocks, like the one I gave my Gold & Silver Trader subscribers this week. (Sorry, that’s for subscribers only.) Or, you could buy ETFs.

The obvious choice is the Energy Select Sector SPDR Fund (NYSE: XLE). It’s stuffed with Chevron Corp. (NYSE: CVX), ExxonMobil Corp. (NYSE: XOM), Phillips 66 (NYSE: PSX) and other big names. It is very liquid and has an expense ratio of 0.13%.


 

You can see that XLE is blasting off already. But it’s sure to zig and zag along the way. If you’re bullish on oil, use the next “zag” lower to load up.

All the best,

Sean

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