As Tesla (Nasdaq: TSLA) and other electric vehicle stocks dominate the financial headlines…
Conventional wisdom among investors is that oil is on its last legs.
In 2020, oil became the most hated asset in history.
Oil prices did more than fall off a cliff. They fell into a well.
On April 20, the price of West Texas Intermediate crude went negative – falling as low as minus $37.63 a barrel.
Boosted by the global economic recovery, investor sentiment gradually recovered. Oil clawed its way back up to $45 a barrel by November.
And just this week, the price of Brent crude oil hit $56.51 – its highest price since the start of the global pandemic.
As is always the case with extreme market sentiment, investors threw the baby out with the bathwater.
Shockingly, Wall Street’s “smart money” now believes oil could go back up to $100 a barrel.
Not only did oil stocks survive the pandemic of 2020…
But the oil sector may offer the single best investment opportunity in 2021.
As commodities guru Jim Rogers likes to say, “No one can revoke the law of supply and demand.”
And understanding how that law applies to oil is key to today’s bullish case for oil and oil stocks.
Let me explain…
An Explosion in Demand
Oil went negative last April after the global pandemic brought global travel to a screeching halt.
Fast-forward to today, and analysts now believe that oil demand may bounce back much faster than expected.
Most of the world has been locked down in quarantine. So it’s only natural that the rollout of vaccines will unleash pent-up demand for travel.
You need only look toward Asia for a glimpse of the future. Asia came out of the pandemic faster than Europe and the U.S. And sure enough, travel demand has exploded.
So much so that some bullish analysts estimate that oil demand this summer may even exceed 2019 levels.
Meanwhile, pundits expect a Democratic-led administration to spend freely to boost U.S. economic activity.
This fiscal stimulus will both boost oil consumption and weaken the U.S. dollar.
Oil and other commodities denominated in dollars will become far cheaper for emerging markets. In a virtuous circle, cheaper oil, in turn, will lift demand and push oil prices even higher.
Before the pandemic, the world was positively awash in oil.
The booming shale oil industry made the U.S. the biggest global producer, overtaking both Saudi Arabia and Russia.
U.S. oil production peaked at 13 million barrels per day.
That number fell to about 9.7 million barrels before rebounding to 11 million barrels per day today.
Still, analysts don’t expect oil production to rebound to pre-pandemic levels.
The sector faces regulatory headwinds from the incoming Biden administration.
Oil majors are investing more in renewables and less in oil production. Ironically, less investment in future oil production means tighter supplies. That in turn could lead to high oil prices in 2021 and beyond.
Yes, the global push toward green energy and electric vehicles is terrible for oil demand.
But that holds true only in the long run.
Investment in green energy – electric charging stations and wind farms – is oil-intensive. Accelerated green investments could even increase the demand for oil in the medium term.
It will be at least five years before green energy matters for oil prices.
Throw in bets on oil as an inflation hedge and more demand from emerging markets… and higher oil prices in 2021 seem like a one-way bet.
So how can you profit from a rebound in the price of oil?
United States Oil Fund LP (NYSE: USO) allows you to invest in oil using near-term futures contracts on West Texas Intermediate crude, rolling into future contracts every month.
For a broader bet on the energy sector, consider the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP).
This ETF invests in an equal-weighted benchmark of companies focused on developing new deposits of oil and gas.
As the oil sector got crushed last year, it may offer an even bigger upside than the price of oil itself. The SPDR Oil & Gas ETF is already up by more than 20% this year.
The bottom line?
Yes, electric vehicle and green energy stocks are grabbing all the headlines.
But don’t count out oil just yet.
The world’s most hated asset in 2020 just may turn out to be 2021’s most profitable bet.
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