Why this broker is tipping the oil price to hit US$75 a barrel even if demand falls

Many investors are wary about investing in oil stocks as the price of crude could collapse as the world moves to embrace electric vehicles. But there’s a more powerful driver for oil prices that most investors are unaware of.

| More on:

The wild gyration in commodity markets over the past two days is fuelling debate on the outlook for crude oil as the world moves rapidly towards electric vehicles.

The future demand for crude will be impacted by the electrification of automobiles, and it’s no longer a question of “if” but “when”.

Everyone can see this tectonic shift but yet the price of crude has defied the sceptics to remain stubbornly high. Many believe it’s the efforts of OPEC and friends to limit production that is keeping oil at such levels, but there may be another more powerful factor pushing oil up, according to Morgan Stanley.

This means the logical price crash for crude may be averted even though the vast proportion of global crude production is used to power vehicles.

While there are other uses of crude, data from the US Energy Information Administration shows that over 40% of crude is used in cars. The second biggest category is heating oil and diesel fuel at 19% and you can bet diesel demand will also fall if heavy vehicles, such as trucks, also become battery powered.

The driver for crude prices is really investment markets and not physical demand, notes Morgan Stanley which is forecasting the Brent crude benchmark to rise to US$75 a barrel in 3Q18 versus its current price of US$69.38 a barrel.

The thing that most investors have missed is that the futures market for crude is circa 50 times larger than the physical market for the commodity.

Global consumption of oil stands at around 98 million barrels a day. This means the size of the traded oil market is only around 43 million barrels a day (mb/d) and that stands in stark contrast to the size of the Brent and WTI (the two global benchmarks for crude) futures market which amounts to around 2,000 mb/d!

This is why the crude price can overshoot on the upside and downside, and remain disconnected from fundamentals longer than you can remain solvent (channelling a quote from John Maynard Keynes).

The broker believes this characteristic will drive crude prices higher this year and this will be welcome news for our listed oil and gas producers like Woodside Petroleum Limited (ASX: WPL), Oil Search Limited (ASX: OSH), Beach Energy Ltd (ASX: BPT) and Origin Energy Ltd (ASX: ORG) – just to name a few.

It’s anyone’s guess how long the futures market can keep oil at lofty levels but at least the impending decline may be averted over the short to medium term.

There is another sector that has a bright outlook for 2018, if not beyond. The experts at the Motley Fool are particularly bullish about the prospects for this industry, and this has nothing to do with the volatile commodities market.

Click on the link below to claim your free report on this sector and the stock that are best leveraged to this thematic.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of May 24th 2021

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Investing