Oil stocks gain after OPEC production plans signal bullish outlook for global demand

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  • Shares of companies tied to the oil sector rose after OPEC + agreed to gradually ease production cuts, signaling a bullish outlook for global demand.
  • The energy sector fund XLE rose 3%, while some oil exploration & production companies rose as much as 12%.
  • Oil prices also neared two-year highs on Tuesday.
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Shares of companies tied to the oil industry rose on Tuesday after OPEC+ agreed to gradually ease production cuts and Saudia Arabia’s energy minister signaled a bullish tone about the global recovery.

At a meeting on Tuesday, the group confirmed its plan to continue to raise production only gradually over the coming two months, implying no change in their current policy.

“The demand picture has shown clear signs of improvement,” Saudi Energy Minister Prince Abdulaziz bin Salman said at the meeting, according to Bloomberg News.

The news that supply will only rise slowly pushed the Energy Select Sector SPDR Fund (XLE) over 3% Tuesday. Exxon Mobil rose as much as 3.9%. Exploration and production companies climbed, with Marathon Oil Corporation and Devon Energy Corporation both climbing over 12%. Pioneer Natural Resources gained 5%.

The energy sector has outperformed the S&P 500 and is the best performing sector in the last month and in all of 2021. XLE is up about 42.4% year-to-date, compared to the S&P 500’s gain of nearly 12%.

Bullish news from OPEC+ also lifted oil prices near two-year highs on Tuesday. Brent crude was trading around $70.17 per barrel at 12:51 p.m. E.T. Tuesday was the first time prices have risen above the $70 mark since March.

OPEC and its non-OPEC partners agreed to stick to the plan first made in April, where 2.1 million barrels per day of supply will be brought back to the market by July, Bloomberg said.

Fundstrat’s Tom Lee said the energy sector is his top sector pick, and one that is a “contrarian” group given widespread skepticism from Wall Street.

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Fundstrat’s Tom Lee urges investors to buy oil stocks as energy ‘FOMO’ picks up, see’s 278% upside in this ETF

FILE PHOTO: An oil pump jack pumps oil in a field near Calgary, Alberta, July 21, 2014. Pump jacks are used to pump crude oil out of the ground after an oil well has been drilled. REUTERS/Todd Korol
FILE PHOTO: An oil pump jack pumps oil in a field near Calgary

  • The fear of missing out is likely starting to pick up for investors who have little exposure to energy stocks, according to Fundstrat’s Tom Lee.
  • The energy sector is up 32% year-to-date, but with such a low weighting in the S&P 500, investors have little exposure to the sector.
  • Lee said one oil ETF could surge 278% if the price of oil makes its way to $80 per barrel.
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The surge in energy stocks so far this year is likely creating “FOMO” for investors who have little exposure to the sector, Fundstrat’s Tom Lee said in a note on Wednesday.

Lee points out that the S&P 500 energy sector has soared 32% year-to-date, making it the best performing sector by a longshot this year. The next best performing sector is financials, with a return of 14%.

But investors have little exposure to the energy sector. According to Lee, the S&P 500 weighting to energy stocks is about 2%. That dynamic “potentially creates performance issues for those underweight energy,” Lee said.

Energy is a “misunderstood” sector, according to Lee. Warren Buffett’s right-hand man, Charlie Munger, probably agrees, who said on Wednesday that he does not foresee a long-term demise in the oil industry.

To gain exposure to the energy sector, Lee recommended investors buy the VanEck Vectors Oil ETF, which is “ridiculously cheap” relative to current oil prices.

“There is a comparative price gap between oil at $60 and where energy equities trade,” Lee explained. 

Based on an analysis of the price relationship between oil and energy stocks since 2009, Lee estimates that the Oil ETF could surge to $530 with oil prices at their current level of $60 per barrel, which represents upside potential of 178% from Tuesday’s close.

And if oil prices continue their upward trend to $80 per barrel, Lee estimates the Oil ETF could trade to $720, representing potential upside of 278% from Tuesday’s close.

“I recommend at least taking a small market-weight position, but obviously, since energy is one of our top 3 sectors for 2021, we recommend a much larger overweight,” Lee said.

The VanEck Vectors Oil ETF traded up 6% in Wednesday trades.

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