Crude oil costs have now breached the $74 per barrel mark and continue to scale greater as worldwide demand recovery improves. Banking on this enhancing demand, Chris Wood, Global Head (equity approach), Jefferies, recommends investors go extended power and brief profitless thematic tech. The ace marketplace strategist has been advocating cyclical trade for a handful of months now with oil being the most favourable. So far this year, the S&P Energy index has zoomed 46.9%, outperforming the S&P 500 which has managed to jump 13%. Oil costs have been inching greater as the demand outlook for crude oil improves with vaccines becoming rolled out across the globe.
S&P 500 Energy index outperforms
Highlighting the trade, Chris Wood in his weekly GREED & worry newsletter highlighted that Elon Musk’s Tesla had been outperforming S&P 500 Energy index because its listing in 2010. However, he added that because February 2 this year, the dynamics have shifted and Tesla has because underperformed by 50%. Chris Wood also pointed out that an index of six properly identified US tech providers, namely Tesla, Snap, Uber, Spotify, Twitter and Slack had outperformed the power index by 450% because the start out of 2020 to a peak on February 2, and has because underperformed by 40%.
Chris Wood stated that the S&P 500 Energy Index has not only outperformed the S&P 500 but has outperformed the FAANG stocks by 71% because November 2020. “It was pointed out to GREED & fear this week that cumulative fund flows into the oil producer ETF, SPDR S&P Oil & Gas Exploration & Production ETF (XOP), have risen by only 20% since June 2020 even though that ETF is up 232% from 2020 low reached last March,” he stated.
Crude oil demand, costs to rebound
“GREED & fear’s positive view on the oil price, which as previously discussed is likely to act as a catalyst for an escalation of the inflation scare in coming months, is based on both booming demand and, even more importantly, a growing lack of supply,” Chris Wood stated. The marketplace strategist additional stated that demand for crude oil should really rebound to pre-pandemic levels of one hundred million barrels per day. Key markets such as China and the United States have seen demand pickup as the economy began re-opening.
While demand has been enhancing, the lack of provide is also important, according to Chris Wood. Investment in exploration outdoors OPEC has been declining because 2014. Financial Institutions have been wary of funding exploration projects yet another cause exacerbating the lack of provide. Wood added that crude oil costs will spike but Russians and Saudis will be wary of also good an oil spike above $one hundred/bbl or greater as that may possibly additional encourage option production.