Energy Stocks & Oil Demand Will Only Increase in 2023
On June 6, 2022, President Biden invoked the Defense Production Act to “accelerate domestic production of clean energy technologies, including solar panel parts.”
The government is getting behind renewable energy in such a big way, Biden used a presidential power typically reserved for emergencies.
If you saw this as a signal to go all-in on renewable energy stocks, you probably weren’t the only one.
While it may one day prove to be the right call, right now everyone’s missing a far bigger and immediate opportunity.
Honestly, this move by Biden only serves as a distraction to the real energy story of the year … and, in my opinion, the rest of this decade: oil and gas.
No matter what the White House does or says, I believe oil stocks will massively outperform the S&P 500 for the rest of the 2020s…
Very few people understand or see this coming…
Let’s get into why a massive oil bull market is taking shape right before our eyes…
Oil’s Next Tailwinds
Turning the clock back one year, we were in the midst of an oil and energy boom driven by two major factors:
A post-COVID demand crunch as people got back to traveling and commuting for work.
Russia’s invasion of Ukraine and the international sanctions against the aggressor that followed.
But a shift occurred in the latter half of 2022, as oil prices fell and investors digested these massive shifts.
We’ll still see some benefits from the tailwinds in the months ahead, but this is a whole new ballgame.
You see, the worst oil and gas producers went out of business during the oil bear market of 2014 to 2020.
But the best ones cut their cost structures down to the bone, ensuring their survival.
And now that crude prices are high again, they’re making record free cash flows.
They’re in the best position they’ve seen in decades … but investors haven’t yet caught on. Many got burned in that six-year bear market I mentioned above, so they’re hardly even looking at energy, let alone buying it.
It’s left many oil and gas stocks trading at dirt-cheap valuations, even after a huge rally in 2022. So much so, the energy sector now makes up 10% of the S&P 500’s earnings … but only 5% of its market cap:
The investors who kept an open mind and saw the opportunity in the “old and dirty” energy sector developing were rewarded.
You can see how this played out by looking at the performance of some of the top oil and gas exchange-traded funds (ETFs) compared to the greener funds like the Invesco Solar ETF (NYSE: TAN) from the start of the bear market:
As you can see, XES is up 81% over the last 12 months, while TAN is up just 3%. (Not to mention, the S&P 500 is down over 17%.)
That’s a 27X bigger return than what you could consider the benchmark “green energy” investment.
The energy sector has pulled back a bit in recent weeks, again on the back of lower oil prices, but the bullish trend in energy stocks has most certainly not run its course…
Global oil demand will continue to rise in the coming years.
And as our demand for oil continues to rise, while the supply side remains tight thanks to years of underinvestment (remember that chart above) … prices will rise.
In short, there’s an undersupply of oil today … since many producers went out of business, and the ones that survived cut costs instead of growing production (the natural thing to do in an oil bear market!).
But now, oil and gas companies are hugely profitable. And despite what President Biden might have you believe…
Oil Demand Isn’t Slowing Down
With a growing world population, oil demand will only keep increasing.
Not only does oil remain the most popular choice for fuel and transportation, but it’s also widely used for thousands of everyday items such as plastics, textiles, cosmetics and lubricants. (Remember, these products aren’t just used by households, but factories and businesses as well.)
So as populations around the world grow, economies require more oil to keep things running smoothly. Demand for oil will increase further.
OPEC is actually projecting the demand for oil to reach record highs in the near future:
As you can see in the chart above, the demand for oil from OPEC nations could reach 12 million barrels per day by 2045.
And that’s just oil from OPEC. The International Energy Agency (IEA) projects that total global oil demand will climb to 105.4 million barrels per day by 2030.
That’s an increase of 100,000 barrels of oil per day from last year.
China, alone, will consume 15.7 million barrels per day by 2030. And with China right in the middle of easing its draconian lockdown restrictions, oil demand from its 1.4 billion citizens is set to surge.
Alongside this growing demand is the need for countries to replace depleting oil reserves.
As Mike Carr showed you earlier this month, the Biden administration took 180 million barrels of oil out of the Strategic Petroleum Reserve this year alone to bring down gas prices.
Those reserves must be replaced … by law.
Twenty-nine other countries committed to tapping oil reserves to compensate for what was lost due to sanctions on Russian oil exports.
So, you have 30 counties that need to replace their oil reserves … and increased demand for oil outside of that replacement.
It all spells a strong rise in oil prices through 2030.
So, where can you find the best energy stocks to benefit? You won’t have to search far…
USA: The World’s New Oil Marketplace
The United States — yes, the same country currently using emergency powers to produce solar panels — is rapidly becoming the new center of the global oil market.
We were once a customer of OPEC oil… Now, we’re turning into a rival.
The IEA projects the U.S. will account for 85% of the growth in oil production worldwide by 2030 as we tap into unmined shale oil formations. By 2025, the U.S. is set to produce 20.9 million barrels of oil a day. By then, combined exports of crude and refined oil will overtake those of Saudi Arabia.
OPEC controls over half the global supply of oil now. That will shrink to 47% by 2025, the lowest since the 1980s.
If you’re looking for steady, reliable returns, U.S. oil stocks could prove to be a lucrative choice.
Many oil stocks have seen incredible growth over the past year due to higher energy demands and increased efficiency of oil production.
In no shortage of words, oil stocks are the place to be right now.
At the very least, you should consider adding some exposure to the Energy Select Sector ETF (XLE) on this recent pullback. It’s a great entry point in what I’m confident will be a long and strong uptrend in this sector.
Chief Investment Strategist, Money & Markets
P.S. Another good move…
Consider checking out this recent research presentation from Charles Mizrahi.
Charles, like me and my team, has been all over the story for the past year. He’s been especially focused on how much fossil fuel is involved in so-called green energy production — which, as it turns out, is incredibly hard to justify!
His approach is different, but we both reach the same conclusion. Fossil fuels will be a big part of our country’s economic future.
If you’re interested in learning how Charles is setting up his readers to profit from this new energy bull market, click here.
1 More Reason Energy Should Dominate
Adam laid out a fantastic bullish case for energy stocks over the coming decade, and I agree. I’ve been long energy stocks for a while now and have absolutely no plans to sell.
But while we’re at it, I thought I’d add another major reason why I believe energy stocks should do phenomenally well in the years ahead: Crude oil is priced in dollars!
Remember, when prices are “going up,” they are going up relative to something.
Our unit of measure is the dollar. But the dollar itself is also a tradable asset, and its value can fluctuate wildly.
Energy has been trending higher in spite of one of the biggest dollar bull markets in history. Ever since the 2008 meltdown, the dollar has been steadily gaining on the euro, yen, pound sterling and just about every other major world currency. If you’ve ever wanted to go to Europe, go now. The dollar is the strongest it’s been relative to the euro in 20 years.
You can see it in the chart below, which tracks the Dollar Index.
But here’s the thing. Dollar bull markets don’t last forever. The dollar was trash relative to the euro and most major world currencies between 2000 and 2008. When exchange rates reach extremes, they reverse. And it looks like we’re seeing the early stages of that today.
The dollar has been weakening since late 2022, and I expect that this trend has a lot longer to run.
Now, I do have one caveat. During market panics, the dollar tends to rise. The reasons for this are complex, but it comes down to a flight to safety. When investors are scared, they sell off riskier positions and particularly leveraged positions, and hoard dollars.
So, if this little bout of volatility we’re in gets worse, I’d expect the dollar to rally a little more in the short term. But the key words here are “short term.” The trend here is lower.
A cheaper dollar means more expensive energy … which in turn means fatter profits for energy company extracting, transporting and selling the stuff.
Just chalk it up as one more major bullish point in energy’s favor.
Chief Editor, The Banyan Edge