Is It Too Late To Invest In The Oil Price Rally?
Energy equities are experiencing strong selling pressure as crude prices drop![]()
![]()
The oil market is currently going through one of the most turbulent periods since the infamous March 2020 collapse, as investors continue to grapple with recessionary fears. Oil prices have continued sliding in the wake of the central bank deciding to hike the interest rate by a record-high 75 basis points, with WTI futures for July settlement were quoted at $104.48/barrel on Wednesday's intraday session, down 4.8% on the day and 8.8% below last week's peak. Meanwhile, Brent crude futures for August settlement were trading 4% lower in Wednesday's session at $110.10/barrel, a good 9.4% below last week's peak. While crude prices have taken a big hit, oil and gas stocks have fared even worse, with energy equities experiencing nearly double the selling pressure compared to WTI crude.
"Year to date, Energy is the sole sector in the green ... but concern now is that fact that Bears are coming after winners, thus they may take Energy down. The Energy Sector undercut its rising 50 DMA and now looks lower to the rising 200 DMA, which is currently -9% below last Friday's close. Crude Oil is sitting on its rising 50 DMA and has a stronger technical pattern," MKM Chief Market Technician J.C. O'Hara has written in a note to clients.
Analysts are at odds about whether the oil rally still has room to run, or whether prices are due to drop further![]()
![]()
Whereas the bear camp, including the likes of O'Hara, believes that the oil price rally is over, the bulls have stood their ground and view the latest selloff as a temporary blip.
In a recent interview, Michael O'Brien, Head of Core Canadian Equities at TD Asset Management, told TD Wealth's Kim Parlee that the oil supply/demand fundamentals remain rock solid thanks in large part to years of underinvestment both by private producers and NOCs.
You can blame ESG—as well as expectations for a lower-for-longer oil price environment over the past couple of years—for taking a toll on the capital spending of exploration and production (E&P) companies. Indeed, actual and announced capex cuts have fallen below the minimum required levels to offset depletion, let alone meet any expected growth. Oil and gas spending fell off a cliff from its peak in 2014, with global spending by exploration and production (E&P) firms hitting a nadir in 2020 to a 13-year low of just $450 billion.
Even with higher oil prices, energy companies are only increasing capital spending gradually with the majority preferring to return excess cash to shareholders in the form of dividends and share buybacks. Others like $BP PLC(BP.US$ and Shell Plc. have already committed to long-term production cuts and will struggle to reverse their trajectories.
Norway-based energy consultancy Rystad Energy has warned that Big Oil could see its proven reserves run out in less than 15 years, thanks to produced volumes not being fully replaced with new discoveries.
Many analysts say that the oil price rally is far from over, and that the latest correction might offer fresh entry points for investors![]()
![]()
Global oil and gas companies cut their capex by a staggering 34% in 2020 in response to shrinking demand and investors growing wary of persistently poor returns by the sector.
$Exxon Mobil(XOM.US$ , whose proven reserves shrank by 7 billion boe in 2020, or 30%, from 2019 levels, was the worst hit after major reductions in Canadian oil sands and U.S. shale gas properties.
$Shell PLC(SHEL.US$, meanwhile, saw its proven reserves fall by 20% to 9 billion boe last year; $Chevron(CVX.US$ lost 2 billion boe of proven reserves due to impairment charges, while BP lost 1 boe. Only Total and Eni have avoided reductions in proven reserves over the past decade.
The result? The U.S. shale industry has only managed to bump up 2022 crude output by just 800,000 b/d, while OPEC has consistently struggled to meet its targets. In fact, the situation has become so bad for the 13 countries that make up the cartel that OPEC+ produced 2.695 million barrels per day below its crude oil targets in the month of May.
Exxon CEO Darren Woods has predicted that the crude markets will remain tight for up to five years, with time needed for firms to "catch up" on the investments needed to ensure supply can meet demand.
"Supplies will remain tight and continue supporting high oil prices. The norm for ICE Brent is still around the $120/bbl mark," PVM analyst Stephen Brennock said after the latest crude selloff.
In other words, the oil price rally might be far from over, and the latest correction might offer fresh entry points for investors.
Happy trading![]()
![]()
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
Read more
Comment
Sign in to post a comment
Giovanni Ayala : It's never to late to Recesse
FCC-bull : The high oil prices is hitting everyone ‘s pocket, our daily life, and that could change the behavior of spending, or even driving less, or with EV. Will this pull down generally the oil prices remains unknown. If the macro trend is lower inventories lead to higher oil prices then I think what could happen is reduced spending could slow down the depletion of inventory, hence degree of supply to demand will reduce. And if so then oil prices will reduce at skmenpoiny in time.
Giovanni Ayala FCC-bull:
efficentupupOP FCC-bull: Thank you for your comments, very good points
efficentupupOP Giovanni Ayala:
Are there still investment opportunities?
efficentupupOP Giovanni Ayala:
JustSurface : heavy into $Direxion Daily Energy Bull 2X Shares ETF (ERX.US)$ definitely see a bounce at least coming
efficentupupOP JustSurface: Take care
Angel Perez57 : I'm looking for how this works
efficentupupOP Angel Perez57: Did you get anything?
View more comments...