By Michael Brush, MarketWatch
5. Global demand is stronger than people think
“We are not seeing signs of demand weakness. Demand has been surpassing to the upside for three or four years,” says Jonathan Waghorn, a portfolio manager at Guinness Atkinson Global Energy Fund /zigman2/quotes/208666626/realtime GAGEX +0.19% , which beats competing funds in its category by three percentage points a year, annualized, over the past five years, according to Morningstar.
This may seem surprising given the signs of a global economic slowdown, and all the reasons to be concerned about global economic growth. They include: Signs of a slowdown in Europe and China, and possible disruptions caused by the breakup of the European Union over Italian debt issues and Brexit.
Two of the biggest concerns appear to be on their way out, though, or aggressive Federal Reserve interest-rate increases and U.S.-China trade wars. We’ve seen declining risks on both fronts in the past week, as I recently suggested might occur.
Progress on U.S.-China trade are a big deal for oil demand because China accounted for 40% of global energy demand growth last year.
6. Iranian oil import waivers won’t last forever
The Trump administration is re-imposing trade sanctions on Iran, but it issued temporary waivers on oil to several big importers of Iranian crude. Those waivers will roll off in March or April. Unless Trump changes course again, that’ll mean Iranian production will drop by 2.4 million barrels per day, to 1 million BPD from 3.4 million now, says Waghorn. For context, global daily oil production is around 92.5 million BPD.
In the background, the U.S. Treasury Department is in the process of knocking Iranian banks off the SWIFT global payments processing system, which will make it harder for countries to import Iranian crude, points out Larry McDonald of The Bear Traps Report.
7. Inventory spikes may not last
Energy investors watch U.S. oil inventories like hawks. Buildups suggest downside ahead for oil prices. But investors may be putting too much emphasis on this gauge right now. That’s because refiners have taken capacity off line for longer than usual this fall, says McDonald. (Taking capacity offline is a normal maneuver in the fall to switch refining capacity over to different kinds of fuel for the winter.) “As refineries are returning to normal, we should expect crude inventories to come back down from recent highs,” he says.
How to play rising oil
I’ve recently suggested Matador Resources /zigman2/quotes/204387276/composite MTDR +3.28% and Encana in my stock letter around current prices. These are quality energy names where the insider buying is attractive.
Breard, at Hodges Capital Management, likes Helmerich & Payne /zigman2/quotes/209685666/composite HP -2.48% , Ring /zigman2/quotes/203476774/composite REI +0.91% , ProPetro /zigman2/quotes/208880046/composite PUMP -2.29% , Solaris Oilfield Infrastructure /zigman2/quotes/202245479/composite SOI -2.27% and Falcon Minerals /zigman2/quotes/205144604/composite FLMN -0.41% , among others.
Morningstar has five-star ratings, its highest, on Cenovus Energy /zigman2/quotes/209205351/composite CVE +1.77% and Energy Transfer /zigman2/quotes/210213433/composite ET -1.36% . It has four-star ratings on Exxon Mobil /zigman2/quotes/204455864/composite XOM -2.47% , BP /zigman2/quotes/207305210/composite BP +0.87% , Royal Dutch Shell /zigman2/quotes/205095589/composite RDS.A +1.25% , Eni /zigman2/quotes/200785836/composite E -0.42% , Chevron /zigman2/quotes/205871374/composite CVX -1.01% , Baker Hughes and Nabors Industries /zigman2/quotes/202661377/composite NBR -0.79% , among others.
McDonald likes to go with exchange traded funds (ETFs). He suggests VanEck Vectors Oil Services /zigman2/quotes/207596637/composite OIH -0.23% , Energy Select Sector SPDR /zigman2/quotes/206420077/composite XLE -1.03% , United States Oil Fund /zigman2/quotes/203483736/composite USO -0.42% and SPDR S&P Oil & Gas Exploration & Production /zigman2/quotes/203527521/composite XOP -0.82% .
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested XOM, BP, RDS.A, HP, MTDR, ECA, PUMP, SOI, BHGE and NBR in his stock newsletter, Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist Group, and he attended Columbia Business School in the Knight-Bagehot program.