Are You Missing the Oil Trade?

OPEC+ maintains its policy output… why Louis Navellier isn’t worried about lower crude prices … escalating tensions in Ukraine raise serious concerns … the latest Consumer Confidence Report

Given the focus on the Fed yesterday, you may have missed the latest news from OPEC.


Load Error

Yesterday, the Organization of Petroleum Exporting Countries and its allies (OPEC+) maintained its output policy. In the wake of the news, crude oil prices drifted lower.

What does this mean for energy investors?

After last summer’s high of more than $120 a barrel, the price of the U.S. benchmark West Texas Intermediate (WTI) crude has fallen all the way down to the mid-$70s. It’s been trading under $80 (with fleeting exceptions) since mid-November.

Is it time to rethink the energy trade?

Let’s go to our resident energy bull, Louis Navellier.

Regular Digest readers know that Louis has been urging investors to load up their portfolios with top-tier oil and gas plays for months

Has that changed now that oil prices are lower?

From Tuesday’s Platinum Growth Club Special Market Update podcast:

There seems to be a lot of anxiety over crude oil prices. And (earlier this week) they did drop.

But the reality is that even at these prices, companies are cranking out record profits.

That’s because the financial community didn’t want to invest in energy companies. So, (energy companies) didn’t have a lot of capital spending. And so, it’s led to pure profits.

To Louis’ point, on Tuesday, we learned that ExxonMobil earned nearly $56 billion in profit in 2022.

That’s an annual record – more than any U.S. or European oil company has ever generated.

From Reuters:

Energy companies have been reporting blockbuster profits since last year, after Russia’s invasion of Ukraine sent oil prices sharply higher.

“Of course, our results clearly benefited from a favorable market,” CEO Darren Woods told analysts, nodding to high crude prices for much of 2022.

And then, just this morning, Shell reported its highest profits in 115 years – nearly $40 billion.

As Louis has pointed out, crude oil prices don’t have to soar back into the $100+ range for oil companies to enjoy huge profits

For example, last year, Exxon reported that its break-even cost is around $41 a barrel. So, in general, everything above a market price of $41 for oil is gravy.

With the price of WTI crude in the mid-$70s, that’s a lot of gravy.

Plus, just because prices are lower now doesn’t mean they will be later this year. Just two weeks ago, the International Energy Agency provided its estimate that global oil demand will hit its highest-ever level later this year.

From CNN Business:

Global oil demand is expected to hit its highest-ever level this year on the back of China’s swift reopening of its economy.

Oil demand could surge by 1.9 million barrels per day to reach a record 101.7 million barrels per day, the International Energy Agency said in its latest monthly report, released Wednesday.

Back to Louis for his bottom line:

I’m very comfortable and confident that energy stocks remain the best bet.

Clearly, they have the best earnings…

In my opinion, energy remains the oasis…

Energy prices could get a fresh tailwind for a reason that no one wants

The conflict between Russia and Ukraine appears to be growing worse.

In his update, Louis pointed toward the recent planned deployment of German and U.S. tanks to Ukraine, while noting the increased tensions.

Louis explains that Russia is amassing troops to get ready for an offensive in the spring. Meanwhile, Ukraine wants every bit of armament the West is willing to send.

On that note, the U.S. is readying more than $2 billion worth of additional military aid for Ukraine. That includes longer-range rockets, which is the first time the U.S. will send this type of weapon.

Back to Louis:

There’s a lot of anxiety going on that we’re on the verge of World War III.

Obviously, NATO doesn’t want Russia to succeed but Russia is not going to give up.

This is tragic, and is very similar to what happened in Syria, where the conflict just never ended…

This is getting to be very serious, and obviously it’s going to have a big impact on energy markets as well.

Supporting Louis’ takeaway of the gravity of this situation, on Tuesday, The Wall Street Journal reported that Russia has violated the New START treaty by refusing to allow on-site inspections of nuclear-related areas.

From the WSJ:

The State Department’s finding that Moscow is in “noncompliance” with the accord marks the first time that the U.S. has accused Russia of violating the treaty, which entered into force in 2011. 

The lack of inspections has also made it harder to verify the number of warheads Russia has deployed under the accord, the State Department added.

The Stage Department went on to describe this as a “serious concern.”

Back to Louis:

This is a big game of chicken and it’s going to be fascinating to see what happens…

I do think this is going to be good for energy prices long-term. But obviously what’s happening is very scary because no one wants World War III to start.

Shifting gears, given the focus on the Fed this week, we overlooked Tuesday’s Consumer Confidence Report

The report provided some interesting insights.

First, here’s the headline number, from MarketWatch:

A survey of consumer confidence slipped in January to 107.1, reflecting growing worries about a potential recession as rising interest rates and high inflation degrade the U.S. economy.

The decline in confidence surprised economists polled by The Wall Street Journal, who had expected the index to rise to 109.50.

It seems economists were anticipating that recent sentiment improvements would continue. At the end of 2022, the index hit an 11-month high, likely based on a resurgent stock market, falling gas prices, and lower inflation numbers.

So, the turn toward pessimism was a disappointment. Perhaps more importantly, forward-looking confidence numbers are slipping.

Back to MarketWatch:

…A similar confidence gauge that looks ahead six months dropped to 77.8 from 83.4.

A reading below 80 often signals a recession within the next year, the board said, but the expectations index has hovered below that level in every month except for one since March 2022…

The survey reflects “waning confidence in the state of the economy in 2023,” said senior economist Ben Ayers of Nationwide. “We project that a moderate recession will take hold by mid-year.”

The next Consumer Confidence Report publishes on the 28th. We’ll report back.

Part of the reason for slumping consumer confidence likely relates to falling housing prices

On Tuesday, we learned that the U.S. housing slowdown stretched into its fifth month. This pushed a measure of prices down 2.5% from its peak in June.

That doesn’t sound like much, but it marks the second-biggest home price correction of the post–World War II era – though it’s nothing compared with the 26% peak-to-trough drop notched between 2007 and 2012.

It also feels like nothing when you consider home prices soared 41% between March 2020 and June 2022.

That said, the slowdown is noticeable.

Here’s the AP News from last week with more:

U.S. home sales tumbled to the slowest pace in nearly a decade as soaring mortgage rates and sky-high prices in 2022 pushed homeownership out of reach for many Americans.

The National Association of Realtors said Friday that existing U.S. home sales totaled 5.03 million last year, a 17.8% decline from 2021.

That is the weakest year for home sales since 2014 and the biggest annual decline since 2008, during the housing crisis of the late 2000s.

So where does housing go from here?

Here’s Yahoo! Finance:

The hottest debate among housing economists and analysts is whether this home price correction will fizzle out or deepen in 2023.

Firms like CoreLogic and Zillow think the tight inventory environment will contain the home price correction going forward.

Meanwhile, firms like Moody’s Analytics, Capital Economics, and Goldman Sachs believe home prices have further to fall even if home sales are nearing their respective bottom.

Moody’s Analytics chief economist predicts we’ll see home prices fall nearly 10% peak-to-trough by the time this correction is done.

Even if that happens, you’re still sitting on one heck of a gain if you bought back in March 2020…and you’re still staring at one heck of an expensive price tag if you’re trying to buy today.

We’ll keep you updated here in the Digest.

Have a good evening,

Jeff Remsburg

The post Are You Missing the Oil Trade? appeared first on InvestorPlace.

Continue Reading