$100 Oil Is A Real Possibility
With the OPEC+ talks on the skids, oil prices have begun to creep higher again. The biggest expectation from this meeting was for the cartel to agree to an incremental production increase that would add 200 million BPD to supply by the end of the year.
In light of the fact there is no agreement, there's no proposal on the table, and the talks have been called off indefinitely, it looks like it'll be later in the year before those increases take place, if at all. What this means for us is the rebound in energy prices and in the energy sector still has some room left to run.
1. Demand Is On The Rise
Regardless of the source of your forecast, the outlook for oil consumption is rising. The EIA predicts global consumption will top 100 million barrels per day later this year and we think that estimate is cautious. At that level, global consumption will be trending just below the all-time high set in 2018 and 2019 and with lower production levels.
The EIA forecasts for energy prices is grounded in the idea OPEC would increase production so those estimates are out the window. What this means is global consumption will likely outpace production up to and until OPEC+ makes a deal, or one of its members turns Wildcat.
2. Oil Can Easily Hit $100
As crazy as it may sound, oil could easily hit $100. This move would be driven by a fundamental change in the outlook that may result in a positive feedback loop. WTI is trading just below the 2018 highs right now and looks like it wants to break out to new highs.
Technically speaking, this would be a very significant break out that could add $30 to $40 to the price of WTI fairly quickly. With WTI trading at $76 right now, that puts prices well above the $100 mark and tickling resistance at the 2014 price peak.
This move is not a guarantee but, if we get a decisive break above current resistance, we see this market moving much higher.
3. Oil Companies And Windfall Profits
Regardless of where the price of oil ends up, it's still trading at multi-year highs and at levels where even the frackers can make some money. What this means for the energy sector is profitability and they haven't been very profitable for the last two or three years.
The energy sector surprised the market in the first quarter and turned in a double-digit year-over-year earnings increase despite an expectation for a larger double-digit earnings decrease because of higher oil prices.
We're expecting to see the energy sector as a group turn in triple-digit earnings increases this quarter that for some may verge on quadruple digits.
4. Dividends And Dividend Increases
The energy sector pays a nice dividend right now and one that we see as not only safe but on the verge of explosive growth. The (NYSE:XLE) energy sector ETF is paying 3.87% and stocks within the group like Exxon (NYSE:XOM) are yielding above 5%.
The payout ratios are still a little skewed versus the consensus earnings estimate, but this is a factor we see correcting itself very quickly over the next couple of quarters.
Exxon, for example, has got a payout ratio running around 90% of this year's earnings, but it improves from greater than 100% in the first quarter to less than 70% in the fourth quarter and next year it gets even better, not counting the fact we expect earnings to beat the consensus by a wide margin.
The takeaway for investors is that a bubble is forming in the energy sector that will drive profitability, profits, and capital returns in the energy patch. What this means for us is the opportunity to trade the market with the idea this is a bubble and it is likely to end very badly for those who hold on too long.