I’ve been bullish on oil and energy stocks since early 2017. It was a lonely trade for a while. But returns have picked up remarkably since last August, when the price of oil finally started climbing.
West Texas Intermediate crude CLM8, +1.81%[1] has risen over 50% since August, to trade at $71 recently. Oil stocks have gone up nicely, too. The SPDR S&P Oil & Gas Exploration & Production ETF XOP, +2.46%[2] is up 48%, compared with 13% for the S&P 500 SPX, +0.74%[3] including dividends.
But I’m still bullish on energy companies in my stock letter, Brush Up on Stocks[4]. It’s too early to sell. One reason is that most investors still don’t believe oil prices and energy stocks will hold, or are headed higher. This means energy stocks remain a kind of contrarian play, despite the recent gains. I can tell, in part, because of the skeptical coverage of energy names and the oil strength in major financial publications, which are often good contrarian indicators.
But I am not the only one who has noticed.
“Divergence between some of the best corporate sentiment we’ve seen in years versus low investor interest highlights a clear opportunity in energy equities,” says Morgan Stanley analyst Drew Venker. This suggests there’s more to come in the rally, he says.
Rising oil prices will help a lot. And that’ll be the trend. I don’t know where oil will trade tomorrow or next week, but here are six reasons why oil will continue higher in the medium term, driving energy stocks up, too.
1. Strong oil demand
Thanks to synchronized global growth, daily oil demand will rise by 1.5 million barrels this year to a new high of 99.3 million barrels, says Jonathan Waghorn, who helps manage the Guinness Atkinson Global Energy Fund GAGEX, -0.04%[5]
2. OPEC supply discipline
The Organization of the Petroleum Exporting Countries (OPEC) cut daily production by 1.2 million barrels in 2016 and have stayed the course. Saudi Arabia needs oil revenue to fund domestic programs that help maintain the peace. For every extra dollar in oil prices, Saudi Arabia gets about $3.1 billion a year in extra revenue, according to Rapidan Energy Group.
3. Geopolitical risk
Energy...