The oil and energy sectors have been in a massive bull market, and yet they remain cheap. Exxonmobil (NYSE: XOM), the 500-pound gorilla in the sector, has a price-to-earnings ratio of 16 and pays a 3.66% dividend yield.
Chevron (NYSE: CVX) has a P/E of 16 and pays a 3.24% dividend. ConocoPhillips (NYSE: COP) has a P/E ratio of 11 and pays a 1.73% dividend yield.
And this is after they are up 50–90%.
The S&P 500, even after the big selloff, still has a P/E of 20 and pays a 1.53% dividend yield.
Despite leading the market and having a booming year, the oil sector is still undervalued to the general market by at least 25%. And knowing the way that the oil market always overshoots — both going up and coming down — by the time the oil bull is over, the sector will be overvalued by at least 50%.
Furthermore, due to the foolish energy policies now popular in the West, most large-cap energy stocks will easily double from here. Many small, little-known wildcatters will go on 1,000% runs.
Here is why. An oil tale in seven charts…
Oil (NYSE: WTI) is selling at $114 a barrel right now. It will go a lot higher.
First of all, China has been locked down in a zero-COVID policy. You’ve seen the pictures of empty streets. When it opens up, demand will boom.
Here in the U.S., the summer driving season is just getting started. Refineries are running at full capacity, turning crude into gasoline to no avail. Gasoline will hit $10 a gallon on the West Coast this summer. Gas stations will be forced to buy new signs.
On top of this, crude production is still well below the 2020 peak.
Windfall tax ideas, ESG, and other idiotic political codswallop will ensure that producers and their lenders don’t go all-in and ramp up production. They are making a lot of money as it is, thank you very much.
The upshot of this is that gas, diesel, and jet fuel will remain in demand and expensive.
Don’t look to oil vats in Cushing, Oklahoma, for the answer. Storage is well below the five-year average.
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On the plus side for those buying gasoline, demand has been flat. However, it won’t stay that way. What happens when jobs get scarce and middle managers demand you show up at the office?
Few are going to the office now, but the trend is up.
It will mean more drivers, more traffic, and higher hydrocarbon demand.
So to sum up — oil is at $114 despite a lockdown in China which reduced consumption by 1.8 million barrels a day and a release from the government's strategic petroleum reserve of 180 million barrels (one million per day) on top of 50 million last fall.
Refineries are running full bore to turn oil into transportation fuel. The crack spread has never been higher. Companies like Valero (NYSE: VLO) are killing it.
U.S. transport fuel inventories are at historic lows despite refineries running full bore. Demand will increase over the summer driving season and into the fall as people go back to the office.
Production is slow to return to pre-COVID levels.
A Russian boycott is just getting started.
OPEC says it is maxed out on production.
China will open up, which will increase demand, and the SPR release will end, which will reduce supply.
The political class will continue to demonize hydrocarbons, and idiotic policies like the “windfall tax” enacted in the U.K. and price fixing like they want in Brazil and Indonesia will continue to hinder production.
The bottom line is that the price of oil is going a lot higher. In my trading service, Launchpad Trader, my readers have been making a lot of money trading oil and energy stocks while the rest of the market burns.
And the profits are only going to get bigger. Buy oil stocks and you too can feel great every time your neighbor whines about the high price of gasoline.
All the best,
Christian DeHaemer
Energy & Capital
