Written by: Gary Ashton
Last week oil prices recovered to pre-Covid19 pandemic levels, with Brent oil futures trading well over $60 per barrel. Additionally, oil prices are trading at the top end of their 5-year range (2016-2020) and are $7 per barrel over the 5-year average price. The recovery in oil prices prompted Russia's Deputy Premier Novak to declare that oil markets are now balanced.
Analysts are divided on the future of the market. For example, in their latest oil market report, the IEA says that world oil demand will grow by 5.4 million barrels per day (mb/d) in 2021 to reach 96.4 mb/d. The demand recovery represents around 60% of the volume lost to the pandemic in 2020 as a more favorable economic outlook underpins more robust demand in the second half of the year. They also note that global implied stock draws accelerated from 1.56 mb/d in 3Q20 to 2.24 mb/d in 4Q20. In December, OECD industry stocks fell for the fifth consecutive month.
Is $100 per Barrel Oil Possible by 2022?
Amrita Sen, the chief oil analyst at Energy Aspects, told Bloomberg in an interview that loose global monetary policy could impact her call for oil above $80 per barrel in 2022, and maybe even $100 given how much liquidity there is in the system now. In the meantime, JPMorgan Chase says they have been bullish on oil since early 2020 on expectations that demand could outstrip supply by up to 2.0 million barrels per day in August 2021. Several Wall Street firms now see global commodities, in general, entering a new super-cycle that could last for years.
A World Without Oil?
Not everyone agrees that oil has a bright future. Reuters reports that some of the world's largest state-owned national oil companies are at risk of wasting up to $400 billion on expensive oil and gas projects over the next ten years just as the transition to alternative energy picks up. For example, the Biden administration has committed to putting the US back into the Paris climate accords, and large automakers are increasingly turning to electric vehicle production. (For more, see: Ford vs. GM – Who Comes Out on Top?)
Transportation Stocks the Big Winner
If investors agree that oil is poised to continue toward $100 per barrel, one way to play it would be an investment in the transportation sector. The SPDR S&P Transportation ETF (AMEX: XTN) is a multi-cap, blended, North American transportation-focused ETF that is up over 16% in the last 12-months. The fund is weighted to consumers' transportation rather than goods with holdings like Lyft Inc, Uber Technologies, and Avis Budget Group. However, it could still be an excellent way to capitalize on a post-pandemic economic recovery. (For more, see: Is Now the Time to Buy "Activity Stocks?")
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