Geopolitical tensions are high.
Russia’s invasion of Ukraine continues. Israel continues its strikes against Hamas in Gaza. Iran launched missiles at Israel last week and funds anti-Israel militant groups in Palestine, Lebanon and Yemen. And China continues to threaten military action in Taiwan to ensure its control over the island, which currently governs itself.
All these conflicts and the uncertainty surrounding them are driving up the price of oil because they could have an impact on the supply of this raw material. OPEC+, a group of oil-producing countries, is also cutting production to support prices. Since December 12, the price of Brent crude has increased 22.9% to over $87 per barrel. Since the end of March alone, prices have increased by more than 5%.
As it does not appear that global tensions will ease anytime soon – and the US labor market and consumption remain strong, supporting demand – oil prices could rise further, some experts say. Additionally, the sector is undervalued, according to LPL Financial.
“Valuations are exceptionally attractive given stable and reliable cash flow margins in most quarters,” Quincy Krosby, LPL’s chief global strategist, said in a note Monday. “Inflows into the sector remain subdued as the price of crude oil continues to be the main driver for investors rather than strong company fundamentals. As a result, the sector remains underowned, or in market parlance, “unloved”.”
How to invest in energy
Crosby highlighted several ways investors can gain exposure to the sector. They understand invest in big oil companies like Exxon Mobil, Chevron and Shell; oil refiners like Marathon Petroleum; exploration companies; drilling companies; natural gas companies; And oil service companies.
In addition to investing in individual companies in these subsectors, one way to gain exposure to these areas of the market is through exchange-traded funds.
Some that provide exposure to the areas above include: SPDR Energy Select Sector Fund (XLE); the iShares Global Energy ETF (IXC); the VanEck Oil Refiners ETF (CRAK); and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
For Joshua Silverstein, analyst at UBS, it is integrated oil and gas companies, involved in exploration, refining and retail, which currently offer the greatest potential. Indeed, they have strong balance sheets, strong free cash flow, investments in carbon alternatives, and much more.
He said Exxon Mobil (XOM) and Chevron (CVX) are his favorite picks in the subsector and have 27% and 26.2% upside, respectively, to his price targets for them.
There is also simply invest in crude oilwhich can be done by purchasing commodity futures or purchasing funds like the US Brent Oil Fund (BNO).
How high could prices go?
Marko Papic, the founder of Clocktower Group, has benefited from much of the wave of rising oil prices in recent months. He thinks Brent crude could rise another $7 to $18 a barrel depending on a range of risks, from a de-escalation of tensions in the Middle East, an Israeli-Palestinian conflict that extends to Syria and Lebanon , and an all-out war between Israel and Israel. Iran. Its base case is that tensions will remain relatively contained.
“In our view, Israel is limited, primarily by its historical dependence on the West (and sometimes the Soviet Union) in military and technological transfers,” Papic said in an April 15 memo.
He continued: “Since we made this thesis in our All Along the Clocktower report in November, Israel has faced increasing constraints from the West due to its military operations in Gaza. These have reached critical levels with G7 countries banning military exports to Israel (Canada and Japan). of the G7, but also Spain and the Netherlands of the EU… so far) and with increasing political pressure on Prime Minister Netanyahu to resign.”
Papic said that if Brent prices rose another $10 a barrel – which would mean $100 a barrel from April 15 – he would take profits on his position.
