THE RETURN OF OIL - (ALMOST LIKE IN THE RETURN OF THE JEDI)

Oil has been hit hard by the global economic lockdown Trader Petri looks at how the meltdown in the US shale oil industry and a lack of investment in conventional wells are about to launch the price of this commodity.

- Petri Redelinghuys and Herenya Capital

We’re going to kick right off with the hotspot sector of the moment: energy. Like most commodities, energy is a very cyclical business. It runs from boom to bust over medium-term periods of time. In other words, these boom-and-bust cycles tend to last only a few years at a time.

Oil is a vital ingredient in the world economy and by the look of recent media reports, the world has attacked this source of energy and has deemed it replaceable. Green energy is all the rage currently but considering the total percentage of energy it supplies worldwide today, it’s actually irrelevant.

Don’t get us wrong, we’re all for green energy, we’re just realistic about how much it’s likely to contribute to the bigger picture over the coming decades. In short, oil is still here to stay, especially as low prices (in our opinion anything below $80 per barrel is low) will make green energy look awfully expensive.

We strongly believe energy stocks will rebound in the next two years and the rebound will be so large that it’s a sector we must invest in.

There are several factors that will cause energy prices to rebound in the coming months and we will examine the most relevant ones. Before we list the factors, we point out that many of these factors were already in play before the Covid-19 pandemic hit; the big drop has just caused the supply dynamic to worsen.

We also need to answer the question: What has changed in recent years such that the Organization of the Petroleum Exporting Countries (Opec) can no longer increase prices by cutting supply?

The shale disruption