The ASX200’s Energy Sector has corrected -22% from this year’s January high while crude oil didn’t turn lower until July when not surprisingly the local names accelerated lower. Crude oil reversed strongly to the upside overnight and we feel its 15% correction is complete with our current target somewhere in the $US75-80 area. The markets skepticism towards crude has been more on the surface because the commodity itself has been trading in clear backwardation implying lower prices moving into the future e.g. December 2021 Crude is trading ~$US64.75 while crude December 2022 is ~$US60.60.
There are a few moving parts in this equation but we feel the main 2 are as follows:
- Many fund managers have been mandated to reduce their exposure to fossil fuels by definition reducing the buyers pool towards the Energy Sector but as we know from Whitehaven Coal (WHC) when things go too far compelling valuation is presented.
- Most economists are expecting the Chinese economy to slow moving forward which will reduce the demand for crude oil hence the backwardation.
We believe oil stocks could be poised to address their underperformance sooner rather than later, it’s a matter of convincing sceptical investors, a few more bullish days will probably deliver the message.
MM is bullish crude oil from current levels
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