Image: Crude oil prices have staged a strong advance to start 2024.
By Brian Nelson, CFA
Geopolitical tensions continue to be elevated as concerns grow that the war in the Middle East could further escalate, and as the war in Ukraine continues to rage on. On April 1, Israel apparently staged an attack on an Iran embassy in Syria that killed several military officials, including three senior Iranian commanders. Iran has indicated that it would retaliate, and many are speculating that the possible attack may be on Israeli soil, which would further increase global tensions. Ukraine has also been actively targeting Russian energy infrastructure, cutting into Russia’s refining capacity.
Many are positioning in energy markets for a potential spike in oil prices should retaliatory action by Iran take place and tensions in the Middle East rise further. West Texas crude is trading north of $85 per barrel while Brent crude is now over $90 per barrel. Crude oil prices have experienced a steady climb since the near-term bottom in December 2023, but if Iran does escalate tensions, a move to $100 per barrel would not be surprising, particularly in light of strong demand and the large drop in U.S. gasoline inventories.
OPEC+ also noted that it plans to keep its expected oil supply cuts in place, meaning approximately 2 million barrels a day of output curbs would remain in place through the first half of the year. According to Bloomberg sourcing the International Energy Agency in Paris, “by keeping the curbs in place, OPEC+ looks to ensure that global oil markets remain in a slight deficit during the second quarter.”
The energy sector was the place to be during 2022, as not having some exposure to it likely meant some tough sledding on the year, as most sectors faced pressure. 2023 was a choppy year for energy equities, but year-to-date in 2024, energy has fared much better. Our two favorite ideas within the energy space remain Exxon Mobil (XOM) and Chevron (CVX) due to their tremendous free-cash-flow generation capacity, which will only be augmented further by the latest increase in crude oil prices. Refiner Phillips 66 (PSX) is another consideration that we like, and the company just upped its payout 10%.
All things considered, crude oil prices are notoriously difficult to predict, and while we could see a rally in black gold to triple digits, there are a number of headwinds working against sustainably higher crude oil prices. For one, as crude oil prices rise, the economics of shale oil become increasingly more attractive. Today’s advances in horizontal drilling technology have made it such that the EIA notes ‘shale oil and shale gas resources are globally abundant.’ Though we don’t view traditional oil and gas plays as great long-term ideas given global supply and the unpredictable nature of crude oil prices, themselves, they could make for some interesting trades, particularly if geopolitical tensions continue to escalate. We include the Energy Select SPDR (XLE) in the Best Ideas Newsletter portfolio and Phillips 66 in the High Yield Dividend Newsletter portfolio.
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Tickerized for XOM, CVX, OXY, PSX, VLO, MPC, EOG, SLB, HAL, APA, BP, COP, PBR, XLE, USO, BNO, UCO, SCO, USL, DBO, DRIP, GUSH, USOI, NRGU, IEO
Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, RSP, SCHG, QQQ, QQQM, and VOO. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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