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$100 Oil or Not, Energy is an Excellent Bet for Investors

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A year after the pandemic-driven epic oil price crash, optimism is back in the sector as prices soared above $70-a-barrel, with talks of a potential spike of more than $100 from top energy traders and forecasters like Bank of America (BAC - Free Report) , Goldman Sachs (GS - Free Report) , Trafigura, Vitol, Glencore and Socar. The bullish outlook is a far cry from the depths of minus $38 a barrel in April 2020.

While it’s typically a case of an ever-improving demand picture against constrained supply, let’s discuss the important dynamics driving the oil markets.

The Odds of Triple-Digit Oil - A Level Not Seen Since 2014

Following last year’s historic plunge, oil has made a remarkable recovery, and a tight commodity market is clearly evident.

Apart from successful vaccine rollouts and the calibrated production cuts by the OPEC+ cartel, the commodity’s upward momentum is being supported by uncertainty over the potential revival of more Iranian exports, easing coronavirus infections in the United States and Europe, the passage of the $1.9-trillion stimulus bill, and signs of robust demand in the world’s second-largest oil consumer, China. In particular, much of the bullish argument is simply a bet on stronger economic growth in the Western markets and the subsequent improvement in consumer spending.

Even though oil prices have rebounded strongly from the coronavirus-induced depths, most producers will likely continue with their cost-reduction efforts in 2021. With not much chance of a significant upstream capex cut reversal this year, drilling activity is expected to remain weak. In other words, this would lead to lack of investment in long-term projects. This capital shortage, coupled with the slowdown in U.S. shale production, point at an impending supply shortfall against demand, especially with most individuals resuming activities post vaccination and pent-up consumption starting to take effect.

Many oil traders believe it to be the perfect recipe to see a price spike north of $100 a barrel for the first time since 2014.

An Economically Damaging Price Point

There is no doubt that the energy space has been tightening rapidly this year but revisiting triple-digit prices might not be the best news for the economy and the oil industry. As fuel rallies there could be demand destruction, especially from the emerging economies that are not only sensitive to commodity prices and currency fluctuations but also are yet to fully recover from the COVID-19 pandemic. Also, $100 oil will not be sustainable for nations which depend heavily on imports as well as finished crude products. 

What Lies Ahead?

Though we do not see the price of a barrel of crude reaching $100 anytime soon, there is a strong argument building for a bull run in the coming months. Demand is set to surpass the pre-pandemic threshold of 100 million barrels per day once again next year, while supply from the OPEC+ coalition looks likely to remain restricted in the foreseeable future. Moreover, 2020’s unprecedented price collapse has prompted operators to trim their exploration budgets by billions of dollars, translating into a relatively dry pipeline of new projects.

With all the tailwinds, the Zacks Oil/Energy sector has outperformed the S&P 500 Index handsomely. It has gained 22.2% so far this year compared to the S&P 500’s 11.8% appreciation. Consequently, some of the major gainers of the S&P 500 this year include energy-related names like Marathon Oil (MRO - Free Report) , Diamondback Energy (FANG - Free Report) , Devon Energy (DVN - Free Report) , Hess Corporation (HES - Free Report) and EOG Resources (EOG - Free Report) .

Marathon, carrying a Zacks Rank of #3 (Hold), is the top-performing energy stock with a gain of 101.50%, followed by Diamondback (89.05%), Devon (83.74%), Hess (71.24%) and EOG (70.42%).

You can see the complete list of today’s Zacks #1 Rank stocks here.

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2021. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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