Wall Street Bullish On Oil Despite Losing Streak

Oil prices fell on Friday but still managed to eke out a slight weekly gain at $68.44/bbl, as investors continued to weigh a bullishly tight global market against the worrying spread of the coronavirus delta variant.

Oil prices have been highly volatile over the past few weeks, with the International Energy Agency (IEA) warning that the spread of the delta variant would slow the global oil demand recovery in its latest report “Growth for the second half of 2021 has been downgraded more sharply, as new COVID-19 restrictions imposed in several major oil consuming countries, particularly in Asia, look set to reduce mobility and oil use,” the IEA wrote in its monthly oil report.

According to the IEA, last month’s demand slump clocked in at 120K bbl/day, and has forecast that growth would drop by ~500K bbl/day during the second half of the year compared to the group’s previous estimate.

The good news: The IEA has raised its oil price outlook for 2022.

Global oil demand is now seen rising 5.3 mb/d on average, to 96.2 mb/d in 2021, and by a further 3.2 mb/d in 2022. The IEA is also predicting that we could start to see a comeback of U.S. shale in the coming year, with supply from non-OPEC producers expected to rise by 1.7 mb/d in 2022, with the US accounting for 60% of the growth. Baker Hughes’ latest weekly survey found that the number of active, oil-targeted rigs in the U.S. jumped by 10 to a 16-month high 397 rigs.

Meanwhile, investors are still trying to determine whether the recent call by the Biden administration for OPEC producers, but not U.S. producers, to pump more oil is bullish or bearish.

“This sent mixed messages to the market and this disjointed flip-flopping energy policy has both critics and supporters of the administration scratching their heads,” Phil Flynn at Price Future has told the WSJ.

Here’s a dive into what a cross-section of other Wall Street experts are saying about the oil price outlook.

Biggest Bubble

An Institutional Investor Hall of Famer is warning that certain sectors of the U.S. market are in bubble territory and has urged investors to quickly diversify to groups that have pricing power in an inflationary environment.

Richard Bernstein, CEO and CIO of Richard Bernstein Advisors, is waving the red flag on long-duration assets, including Big Tech, long-term bonds, meme stocks, and bitcoin.

“We are right in maybe the biggest bubble of my career,” Bernstein has told CNBC.

“The Fed has so distorted the long-end of the curve that we are seeing a very natural reaction among long-duration assets which is then taking on a life of its own. Anybody who’s out there in these long-duration assets has to be firmly convinced that long-term interest rates are not going to go up because that’s the kryptonite for this bubble.”

Bernstein recommends investing in Energy (NYSEARCA:XLE) and Materials (NYSEARCA:XLB).

“I find it very interesting that energy over the last six or 12 months has been in a major bull market and everybody says it’s unsustainable. Bitcoin has been in a major bear market, and everybody is waiting for it to come back.”

Energy Sector Still Investable

In an interview with CNBC’s Trading Nation, Tocqueville Asset Management portfolio manager John Petrides says the energy sector remains investable due to rising earnings and the simple fact that the world will continue using fossil fuels for decades. Over the past two quarters, oil and gas companies have posted the biggest earnings growth thanks to improved commodity prices. Petrides also points out that energy is under-owned and undervalued since it makes up only 3% of the S&P 500.

More importantly, he points out that many oil companies have increased their dividends, which can act as a big draw in this low-yield environment. He recommends Chevron (NYSE:CVX), calling it “a beacon of safety” within a volatile oil market.

Regarding the oil price outlook, Petrides has predicted another oil rally:

In the most recent pullback, crude oil went back down and retested its July lows, but if you look at the XLE, the energy stock ETF, it did not retest its lows, it outperformed. That’s telling me that WTI is going to bounce back, and when it does, that will exacerbate the rally in the XLE, and it will take off again.

Petrides has, however, cautioned that the oil market could enter bear territory if WTI breaks below the $65.20 level.

Long-Term Bullish

Phil Flynn of The Price Futures Group and AMCP portfolio manager Jay Hatfield have said that the long-term oil price outlook remains bullish despite the short-term headwinds posed by the pandemic.

If COVID concerns ease a bit, then reports of falling global oil inventories should ignite another rally,” Phil Flynn has said.

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