Oil prices are rising, but crude won’t be king forever.


For many investors, trading commodities can seem like a whole different world that defies the norms of the equities market.

Oil in particular has had a roller coaster of a year so far. Crude prices spiked in April, before plummeting in June after OPEC+ announced their plans to reduce production cuts in the third quarter of this year.

Despite OPEC+ plans to add more oil supply back to the market, a slew of factors, including rising tensions in the Middle East, Russia’s ongoing war in Ukraine, and seasonality, have created the conditions for weakened supply and heightened demand, spurring prices higher.

Now oil prices have recovered, with West Texas Intermediate (WTI) crude oil futures reaching over $80 a barrel yesterday—their highest price in two months.

“After initially selling off post the OPEC meeting, crude prices have now recovered and are +11% over the past two weeks,” explained Morgan Stanley equity analyst and commodities strategist Devin McDermott in a research note today.

Wall Street analysts forecast oil prices will continue to climb higher this summer, when seasonal demand rises. The kickoff of summer travels leads to increased demand for gas as more Americans hit the road, and historically the price of the commodity is driven higher as a result.

“The seasonal demand increase, as illustrated by the latest Energy Information Administration data, renewed confrontation between Israel and Hezbollah, and the hurricane season could sustain price strength into the summer,” wrote Citi analysts in a recent note.

Should you invest in oil?

But if you’re looking at your equity portfolio and wondering why oil stocks aren’t reaping the same rewards as the commodity itself, you aren’t the only one confused.

“Notably, energy equities are roughly flat over the same period, lagging [West Texas Intermediate] by 11%,” wrote McDermott in a research note today. “Softening inflation expectations as well as concerns around economic growth, oil demand, and elevated spare capacity have all played into the rotation out of the sector,” he added.

But McDermott added that he still sees room for “oil-focused producers to catch up with the commodity” due to seasonal demand and improved valuations. However, he added, “Risks from elevated spare capacity and slowing economic growth still exist, and could become more pronounced later in the year.”

Another factor to consider is that in the long run, the growth of clean energy will cut into oil’s market. A recent report from the International Energy Agency projected that oil demand will peak in 2029—a prediction that OPEC denied and countered with their own peak demand date of 2045.

Even though oil can be a bullish investment in the short term, demand will likely slow in the years ahead as more economies transition to solar, wind, nuclear, and other forms of renewable energy. It’s not going to happen tomorrow, and smart investors can still squeeze plenty of profit out of oil for now, but they should also be preparing their portfolios for a transition away from oil in the years to come.—LB



www.morningbrew.com

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