The next big wildcard for oil

Oil prices have faltered since OPEC+ talks collapsed due to major disagreements among members. Major cracks appeared in the ministerial meeting with the United Arab Emirates that continued to block an agreement because it wants to increase its oil production before demand falls as per WSJ. The market fears that the UAE may “wants out of OPEC so it can pump 4M bbl/day and make hay while the sun is shiningPhil Flynn, market analyst at Price Futures Group, said: Market overview.

But somehow the outlook for the oil price is getting worse.

New travel restrictions in Asia have just dashed hopes of a recovery in jet fuel demand this year, and the outlook for the entire refining industry deteriorates due to a rebound in COVID-19 infections.

The worsening pandemic in Asia due to the Delta Covid-19 variant is expected to ground flights and pose a serious challenge to refineries, despite more encouraging trends in Europe and the United States.

Weak margins for jet fuel

“The continued weakness in jet fuel cracks would certainly weigh on overall refining margins in Asia. There is a portion of the jet pool that cannot be drained elsewhere. And its poorer cousin, kerosene, sells for much less than jet pool,” Sukrit Vijayakar, director of Indian energy consultancy Trifecta, told Reuters.

While Asia was one of the first regions to emerge from the COVID-19 lockdowns in 2020, a new flare-up of new species in recent months has forced several key destinations such as Japan, South Korea, Indonesia and Vietnam to re-enforce movement restrictions. sharpen.

To get an idea of ​​how bad the situation in Asia has become, consider that scheduled flight capacity in Japan was 55.6% lower than the corresponding week in pre-pandemic 2019, while capacity in South Korea, Australia and India fell by 46.4%, 56.7% and 40.1. %, respectively.

In stark contrast, US and European aviation capacity has recovered much faster, giving refineries in those markets a growing market for the fuels they produce.

Refineries in Asia are saddled with growing amounts of excess jet fuel that they cannot store for long periods of time due to a tendency to deteriorate in quality. That forces them to either sell to other regions or mix it with other lower value fuels – at the expense of margins.

Fortunately, winter can provide a much-needed respite for Asai refineries.

Furthermore, the outlook for jet fuel demand is expected to improve towards the end of the year thanks to successful vaccine rollouts and improving seasonal heating demand.

Overall, experts expect this should help boost Asian jet refining profits to $7-9 a barrel in the fourth quarter, from about the current $6-8 a barrel against Dubai oil.

Energy sector heavily out of favor

An even bigger reason to remain optimistic: The energy sector remains heavily out of favor and Wall Street has little choice but to bite the bullet sooner or later given the sector’s excellent performance relative to other market sectors.

“I’ve had a lot of conversations with institutions in the last few days and I can tell you that most institutions are extremely ‘underweight’ in the energy sector. Because this is the best performance for the energy names since 2005, they will have to buy them. They will have no choicee,” Piper Sandler’s Craig Johnson, the company’s senior technical research analyst, told CNBC.

Johnson recommended buying the XLE ETF directly or investing in individual energy stocks, focusing on top positions ExxonMobil (NYSE:XOM) and Range Sources (NYSE:RRC).

We love Johnson’s choices and recently recommended XOM as a top dividend stock.

The largest integrated oil and gas company in the United States, ExxonMobil Corp. (NYSE:XOM) is also one of the leading dividend aristocrats in the energy sector.

Exxon Mobil Corp has been mentioned in the Dividend Channel ”SAFE 25” list, meaning a stock with above-average ”DividendRank” metrics, including a strong forward return of 5.52%, as well as an excellent track record of at least two decades of dividend growth.

Last quarter, Exxon reported that industry fuel margins have improved significantly from the fourth quarter, but are still below 10-year lows due to high product inventory levels and oversupply in the market.

The best part: Cash flow from operating activities was $9.3 billion and managed to fully fund the dividend and capital expenditures and pay off debt by more than $4 billion.

Meanwhile we have also recommended oilfield service companies (OFS) as drilling activity gradually increases.

Companies providing oilfield services such as Schlumberger, Halliburton (NYSE:HAL) , Baker Hughes (NYSE:BKR), and National oil well Varco (NYSE:NOV) are now reporting that prices for their services and equipment have bottomed out, with many now recruiting new employees.

It is a clear sign that crude oil production in the US is picking up again after a very depressing period. Indeed, for the first time since the pandemic struck, US shale production is expected to increase by 38,000 barrels per day in August, despite oil and gas producers’ generally flat spending.

While the Fed sees GDP growth moderate to 3%-3.5% next year, from about 7% this year, that’s still very strong growth when you consider that between the 2008 financial crisis, the U.S. year with 3% growth and the pandemic.

The energy sector may be out of favor and trending on the “wrong” side of a war on climate change, but the market is the market, and for now it dictates that traditional energy stocks will still be the best performers, even if solar and wind had a nice run and investors are still doubling down. They’re in it for the long haul, but there’s a lot of time between now… and then.

By Alex Kimani for Oilprice.com

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