In recent months, the oil market has taken investors on a wild ride…
Despite several factors that should be acting as tailwinds for the market… oil prices have plummeted.
Just six months ago, West Texas Intermediate (WTI) crude was sitting at highs of around $85 per barrel.
Today, it’s below $70.
So, what exactly is causing the pullback? And how long will it last?
Let’s take a closer look at the situation… and how savvy investors can navigate it.
The oil pullback won’t last long
Several factors are driving the drop in oil prices…
For one thing, weak demand acceleration out of China, Europe, and North America has investors concerned about a global slowdown in the oil market. China, in particular, has historically been a top oil importer, so a pullback in demand would definitely shake the energy sector.
What’s more, the markets have been anticipating possible production increases from OPEC+ in October.
Remember, OPEC has been decreasing oil production to offset the weaker demand and slowing economies worldwide. But it’s been planning to start unwinding those production cuts.
The combination of increasing supply and lukewarm demand isn’t exactly bullish.
But the oil selloff is way overdone… Below the surface, several ongoing factors support rising oil prices.
For one thing, OPEC+ announced it would be delaying its production increases until at least December.
Meanwhile, the current oil supply is the lowest it’s been for a while…
Last week, U.S. crude oil inventories saw a drawdown of 6.9 million barrels. That’s a staggering amount for a week, far exceeding analysts’ expectations. This drawdown has pushed inventories 5% below the five-year average for the first time this year.
What’s more, oil demand remains robust despite economic headwinds.
Historical data from Statista shows that significant drops in oil demand are rare. The only significant drop between 2005 and 2023 was during the COVID pandemic.
Put simply, barring another black swan event that triggers an economic lockdown, oil demand isn’t about to fall off a cliff anytime soon.
In fact, energy demand is projected to skyrocket thanks to the emergence of artificial intelligence and other cutting-edge technologies. In recent history, energy demand has remained flat year over year… Now, it’s projected to grow at 2–3% annually for the foreseeable future.
How to profit from oil’s multiple tailwinds
For those looking to capitalize on the current situation, one stock to consider is Permian Resources (PR).
Even with the oil price pullback, this company has shown remarkable strength. PR recently increased its dividend by a staggering 150%—from $0.06 to $0.15 per quarter. Plus, it expanded its share repurchase program to $1 billion.
What’s more, management says its new base dividend is sustainable “through future down cycles”—which it defines as oil prices below $50 per barrel for over two years.
Also, look for companies with strong balance sheets, like Devon Energy (DVN). With its strong financial foundation, this company is in a good position to weather downturns in the oil cycle.
Oil majors like ExxonMobil (XOM) are always a solid bet. Their diverse operations can help them ride out market fluctuations.
We also have several energy plays within buy range in the Curzio Research Advisory portfolio. Join now to access them.
Remember, the oil market is notoriously cyclical. While the current pullback has caught many off guard, history suggests the oil sector will bounce back.
And with several tailwinds at play, the current pullback presents a solid entry point for savvy investors.
