Patience with Oil Stocks
Why oil stocks make so much sense - particularly in a general market that seems to know no limits.
These days in the markets, patience is a virtue.
We’ve become accustomed to so many days, months, even years of very active and volatile trading that even the smallest slowdown in activity seems like the beginning of the end – of the long stock market rally, that is.
Patience.
The broader averages continue to plug along, of course. I let those stocks take care of themselves – the banks, materials, drugs and tech. It’s not like I don’t own plenty of these in my own portfolio of course, but they won’t attract much of my comment, being the energy guy. And in energy, we’re definitely nearing some kind of crossroads— oil markets feel like they are to me, anyway.
There are two worlds out there for energy: the fundamentally sound and practical case for higher oil, and the continuing fantasy hype of renewable energy quickly displacing fossil fuels. Media is alive with the significant number of government initiatives, hopeful narratives and a literal mountain of “green” articles and essays I plow through every day. In the new Biden energy world, the coming infrastructure package has billions in incentives for green energy development, Gary Gensler of the SEC is cracking down on ESG funds that aren’t truly green, A big NATO meeting cementing the Paris accords is coming in June, Texas is going to soon surpass California (!) for utility scale solar and even Exxon is crowing about their latest carbon capture plan.
Wow – with all of that, you’d be nuts to invest in oil stocks, right?
Only the real world I see is telling quite another story. The practical end of the pandemic and its economic slowdown, will bring with it a deficit of 2m barrels a day of oil between demand and real supply – the first truly global supply shortage that the oil markets have seen since – oh, since 2013. And for once, the US powerhouse independent shale operators have been sufficiently crushed in the last 3 years of bad cash flow to be entirely unable to respond to that demand shortage – no matter where oil prices go. They’re down 2 million barrels a day from their peak production levels, without the plans or the capital to ramp their oil output up much at all, whether oil stays here, or even travels upwards towards triple digits.
But, looking at the markets, you don’t see any enthusiasm for oil stocks right now, despite their terrific first quarter of 2021.
You don’t have to tell me they’re a frustrating sector to cover in a overall market that continues to trend higher. After that terrific run from December through March, oil stocks have been taking a break. To me, that’s a function mostly of inept vaccine distribution outside of Israel, New Zealand and to a degree here in the US that’s kept a lid on oil prices – if you call $60 a barrel a lid. India’s latest surge of cases, the pathetic response to the epidemic in Brazil, Argentina and the rest of South America, as well as an unexpected 11% increase in cases here in the US has put the damper on oil stocks – for now.
Patience.
The setup looks so good to me, it’s hard to keep my enthusiasm in check. Sure, there’s the continuing stress of a general market rally that seems to have no end, and the anxiety of the ‘inevitable’ market reckoning of a 34,000 point Dow and 4100 S+P. But if we can ignore that (as we’ve been able to for the past several years at least), there’s real value in turning to oil stocks right now – just as the rest of the market seems so overbought.
The best profits I’ve ever made in oil and oil stocks has been in setups precisely like this – a general investor hate of commodities, a disbelief in the continuing need for more oil, not less, and a fanciful hype of alternatives that just can’t yet take up the coming supply slack.
I’ve set up my subscribers with the kind of strategies to have the patience that’s needed to fully take advantage of the next leg up in oil and oil stocks. And it’s coming. Those strategies let them continue to collect dividends and premium while they wait for that inevitable move. And allow them to exercise one of the most important qualities of successful investing.
Patience.