Crude oil prices have now breached the $74 per barrel mark and continue to scale higher as global demand recovery improves. Banking on this improving demand, Chris Wood, Global Head (equity strategy), Jefferies, recommends investors go long energy and short profitless thematic tech. The ace market strategist has been advocating cyclical trade for a few months now with oil being the most favourable. So far this year, the S&P Energy index has zoomed 46.9%, outperforming the S&P 500 which has managed to jump 13%. Oil prices have been inching higher as the demand outlook for crude oil improves with vaccines being rolled out across the globe.
S&P 500 Energy index outperforms
Highlighting the trade, Chris Wood in his weekly GREED & fear newsletter highlighted that Elon Musk’s Tesla had been outperforming S&P 500 Energy index since its listing in 2010. However, he added that since February 2 this year, the dynamics have shifted and Tesla has since underperformed by 50%. Chris Wood also pointed out that an index of six well known US tech companies, namely Tesla, Snap, Uber, Spotify, Twitter and Slack had outperformed the energy index by 450% since the start of 2020 to a peak on February 2, and has since underperformed by 40%.
Chris Wood said that the S&P 500 Energy Index has not only outperformed the S&P 500 but has outperformed the FAANG stocks by 71% since November 2020. “It was pointed out to GREED & fear this week that cumulative fund flows into the oil producer ETF, SPDR S&P Oil & Gas Exploration & Production ETF (XOP), have risen by only 20% since June 2020 even though that ETF is up 232% from 2020 low reached last March,” he said.
Crude oil demand, prices to rebound
“GREED & fear’s positive view on the oil price, which as previously discussed is likely to act as a catalyst for an escalation of the inflation scare in coming months, is based on both booming demand and, even more importantly, a growing lack of supply,” Chris Wood said. The market strategist further said that demand for crude oil should rebound to pre-pandemic levels of 100 million barrels per day. Key markets such as China and the United States have seen demand pickup as the economy started re-opening.
While demand has been improving, the lack of supply is also significant, according to Chris Wood. Investment in exploration outside OPEC has been declining since 2014. Financial Institutions have been wary of funding exploration projects another reason exacerbating the lack of supply. Wood added that crude oil prices will spike but Russians and Saudis will be wary of too great an oil spike above $100/bbl or higher as that may further encourage alternative production.