Oil prices have been wild during the COVID-19 crisis, but things have been looking up for black gold lately …
And I think it’s only higher from here.
To start, WTI oil recently climbed back above $60 per barrel — nearly to pre-pandemic “normalcy” …
Remember one year ago, when crude futures briefly turned negative??
Meanwhile, the Energy Select Sector SPDR Fund (Ticker: XLE) exchange-traded fund (ETF) — which largely mirrors the movement of crude oil futures — has also been on fire so far this year, and the shares are approaching a key level …
Not to mention, the big dogs of the industry — OPEC+ and the International Energy Agency (IEA) — just said they expect oil demand to continue climbing in 2021 …
And, frankly, I’d have to agree.
In a nutshell, I think the energy sector is ripe with opportunities for traders right now — and today, I want to dive into 3 reasons oil is headed to $70 a barrel.
Reason 1: A New (Kinda) Era
Unless you’ve been hiding under a rock, you’re probably aware that President Joe Biden is a political warrior against climate change.
Sure, he’s not as active a warrior as some in his party would hope … but compared to the guy he replaced in the Oval Office, he’s a regular Sun Tzu.
So when the power dynamic in Washington, D.C., shifted again in January, it was all but expected Biden would roll back some Trump-era policies that favored big oil.
In fact, earlier this year, Biden issued an executive order revoking a Trump order that revoked an OBAMA order (got all that?) permanently banning offshore drilling in the Arctic and Atlantic Oceans.
Of course, anyone with a basic grasp of economics and the law of “supply and demand” can see why idled offshore drilling should translate into higher oil prices …
Less supply of a non-renewable resource + what I believe will be increasing demand = $$$.
Reason 2: Even Green Energy Needs Black Gold
Speaking of climate change, a common misconception is that all “green” energy is “clean” energy (i.e. – sans dirty oil).
However, that’s just not the case.
Take electricity, for instance.
We see more and more hybrids and electric vehicles on the road every day, but while that may eliminate or cut down on trips to the gas pump, it doesn’t mean oil was rendered entirely obsolete.
In fact, according to OPEC, “electricity generation” accounted for almost one-fifth of oil demand in 2019, among Organisation for Economic Co-operation and Development (OECD) member countries.
Courtesy of the OPEC World Oil Outlook 2045
Further, while I don’t pretend to be an industry expert on wind and solar power, I know the steel and carbon fiber required to produce some of the turbine blades and other equipment requires fossil fuels …
And don’t forget the oil needed to transport and ship all that green equipment …
So, although we seem to be on the right track, collectively, as far as reducing our carbon footprint, it’ll be a looong while — after you and I are dead — before oil demand is a total afterthought.
Reason 3: We’re Friggin’ Stir Crazy
I don’t know about you, but spending the past year mostly stuck in the house has been a mental challenge, to say the least.
Not that I don’t love quality time with the fam, buuuut … Humans just weren’t meant to be caged that long.
Per an Airbnb travel report issued in December, “the out-of-home activity that Americans miss most is travel for pleasure — just ahead of going to restaurants and bars.”
What’s more, 54% of the adults surveyed had either already booked a trip, were planning to book a trip, or expected to travel in 2021.
Courtesy of Airbnb’s “From Isolation To Connection – Travel in 2021”
While traveling internationally is pretty difficult these days, I know plenty of freshly vaccinated Americans anxious to GTFO and explore the States this summer.
I told you earlier my thoughts on several airline and cruise stocks that could benefit from a global reopening, but many people may still feel unsafe traveling that way …
But they’re not afraid to drive!
Before the pandemic, the top 10 destinations among Airbnb users included just two U.S. cities — L.A. and New York.
In 2021, the locales with the biggest year-over-year increases in search activity included Rodanthe, N.C., and Forks, Wash. (where “Twilight” was filmed, of course), as one in five adults said they wanted their destination to be within driving distance of home.
More cars on the road = more oil demand.
Watching the Charts
In closing, as I expect WTI prices to hit $70 a barrel — they traded above $63/barrel on Friday — I’ll be keeping an eye on stocks like Exxon Mobil (Ticker: XOM) and Marathon Oil (Ticker: MRO).
I’ll also be keeping tabs on the aforementioned XLE fund, which is basically a microcosm of the energy sector.
Shares of the ETF recently pulled back from the $54 area, which is about double their late-October lows.
XLE is now testing a foothold atop its 50-day simple moving average (SMA), which acted as a springboard in late February 2021, and could once again lift the fund.
XLE chart – courtesy of StockCharts.com
The ETF will have to take out the $57 region to truly get back to its pre-pandemic neighborhood …
But if oil gets to that $70/barrel marker, something tells me that shouldn’t be a problem for XLE.
Your Only Option,