Oil has had an interesting year. Prices started out in the high $50s a barrel and then famously went to negative $38 a barrel before bouncing back sharply to $43 a barrel where we stand today.
It was a great flying “V” of a year in oil. But we are in the business of making money. And to make money, we need to know not where oil has been but where it is going.
A glance at today’s news tells us that oil prices are up because OPEC+ members are holding to their production cuts from last month.
And furthermore, Bloomberg has reported that Chinese state-owned oil companies are loading up. They’ve booked tankers to carry 20 million barrels of U.S. crude oil in August and September. This would suggest that the global economy is ramping up again and demand is back.
A recent picture of thousands of people at a massive pool party in Wuhan, China — the place where COVID-19 started — and a subsequent claim of “no new cases” by the Chinese suggest that the factories don’t care about the pandemic.
This will be bad for the elderly population of Wuhan but good for the price of oil.
We here at Energy and Capital are bullish on the price of oil, predicting that oil will move into the low $50s over the next three months. As I write this, oil is in contango, which means that contracts are priced higher a few months out than they are today.
There is a lot of oil in storage and this is getting worked off. However, demand is rising at the same time that supply is shrinking. COVID-19 has gutted long-term supply growth by stopping exploration and canceling greenfield projects.
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It’s all about capex, and banks, which are faced with failing loans to oil companies, won’t spend more money on new projects.
That being said, those oil companies that are profitable with strong balance sheets are doing extremely well.
Pioneer Natural Resources (NYSE: PXD) for example is up 103% in the last five months.
Valero Energy (NYSE: VLO) is up 67% and pays a 7% dividend.
Apache Corporation (NASDAQ: APA) went from $4 to $15.40 and is still well below its high price of $66.
My good friend Keith Kohl has put together a free report that will be out on Thursday. In it you’ll find possibly the best oil buy in the last 10 years.
All the best,
Christian DeHaemer Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
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