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Oil prices to steady and then climb

If someone put a gun to your head and said, ‘where will oil prices be in 6-12 months time, higher or lower’? What would you say? 

I would say higher and here is the rationale:

  1. The oil market has been cornered by an unusual combination of falling demand due to COVID 19 and rising supply due, in part, to Saudi and Russia falling out at the last OPEC meeting.
  2. Once COVID19 fades, as it should do within a year at least, then demand should pick up again. 
  3. With Saudi needing US oil at $80 a barrel and Russia $40 a barrel to balance their books, then it would make sense for the present truce to continue. 

Ok, that’s the argument for higher oil prices. What’s the argument against? 

  1. Supply likely to remain elevated and lower oil prices will be here permanently from now on.
  2. Fossil fuels are on the way out and this is the start of the end.

Look at stocks to benefit from higher oil prices

Contango and Backwardation

So, for these reasons above, at first glance you may favour trying to buy US oil futures at market and holding for 6-12 months. The likely target would be a move back into the $40 and $60 range. The main problem for this is that as the oil contracts expire for the next month you need to pay for the rollover. The oil market is in contango. which means you are going to be hit with a high rollover. That can eat into future profits.  There have been warnings about this for some time as the latest oil contract expires. One way round this, but still profiting from the low oil price, would be to invest in some big name oil companies like BP, Shell and Exxon Mobil. You would favour higher prices in these shares by next year.

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