Is a Rebound Coming in Q4? The Contrarian Case for Oil Investment
Don’t expect $100-per-barrel oil anytime soon. Last week, Saudi Arabia, the world’s top crude exporter, announced it will give up its $100 price target as it plans to increase crude output in December. This decision adds to the already existing oversupply of oil relative to demand, with West Texas Intermediate Crude trading in the upper-$60s.
But is the oil patch toxic? Should investors just wait out the weakness? Or is there a bullish case to be made?
Will the Real Oil Demand Please Stand Up?
Let’s analyze oil’s prospects for the remainder of the year. Prices have been dropping due to an oversupply of oil compared to demand. With OPEC considering adding more supply, higher prices will only materialize if demand increases significantly. However, with interest rates falling in the U.S., it’s unlikely that demand will spike in the next three months.
But What About China?
China recently announced significant stimulus measures to revive its economy, potentially impacting oil demand. However, forecasts by OPEC and the IEA regarding future energy demand from China are widely different, creating uncertainty. While China’s stimulus may support oil prices, expecting a surge to the $80s by New Year’s is a risky bet.
Is Extreme Bearishness a Sign of Bullish Returns?
Traders’ sentiment towards oil is currently extremely bearish, suggesting that higher prices may be on the horizon. Historically, extreme bearishness has often preceded bullish returns, indicating a potential opportunity for investors.
What’s the Medium/Long-Term Case for Oil Investment?
The balance between supply and demand will ultimately determine oil prices. While there is currently an oversupply of oil, factors such as climate change policies and declining investments in new production could lead to a supply shortage by 2025. This shift in the supply/demand balance could result in higher oil prices in the future.
Exploring Big Oil Valuations
Despite potential short-term fluctuations, Big Oil companies are currently trading at attractive valuations compared to the broader market. Stocks like Exxon, Shell, and ConocoPhillips offer lower PEs and higher dividend yields than the S&P, making them potentially lucrative long-term investments.
Immediate Action Step:
While Big Oil stocks present long-term investment opportunities, it’s crucial to consider the current market trend. With momentum bearish in the short term, waiting for more evidence of a trend reversal is advisable. However, the supply/demand imbalance suggests a potential shift towards bullishness in the future.
In conclusion, while short-term uncertainty exists in the oil market, the long-term outlook for oil investment appears promising. Patient investors who consider the evolving supply/demand dynamics could capitalize on future price movements in the oil sector.