Crude oil looks poised for an upside break

While the diesel crack, which reflects the profit in dollars per barrel of refining a barrel of WTI to NY ULSD (Ticker: Hoc1) has eased a bit during the past week, the gasoline crack, meanwhile, continues higher with US motorists currently paying a record average price for gasoline around $4.5 per gallon. Later today the US EIA will release its weekly stock report and expectations, backed up by the American Petroleum Institute’s report last night, point to another significant draw in US stocks of crude oil and gasoline.

So far, we are seeing no signs of demand for diesel and gasoline having started to suffer, and with the US driving season still weeks away, the risk of even tighter markets into the busy summer demand season remains.

Since the early March peak across key commodities the Bloomberg Industrial Metal Index has slumped by 25%, the agriculture sector is up 3% while the energy sector has risen by close to 13%, thereby bringing the year-to-date gain to 72%. Unfortunately given the market behavior during this time only a sharp deterioration in the outlook for global economic growth may prevent the price of crude oil from rising further during the coming months.

One potential olive branch to the market could be easing sanctions on Iran and Venezuela paving the way for increase exports. On Tuesday, the Venzuelan government confirmed that the US had authorised American and European oil companies to start negotiations to resume operations. The move will allow American oil company Chevron, the only one that still has a presence in Venezuela, to negotiate its license with state-owned oil company PDVSA to continue operations in the country. Venezuela, a +3 million barrel per day producer around the turn of the century has since seen its production slump to around 700,000 barrels per day due to US-led sanctions on the governments of Chávez and Maduro.

While the soon-to-expire June WTI contract has broken higher, Brent has yet to follow as China lockdowns continue to curb further price gains. We do, however, see the short-term risk of higher prices with demand destruction not yet meaningful enough to offset a market in tight supply.

Global energy stocks are the cheapest in 27 years writes my colleague Peter Garnry in his latest equity market update. In it he says that global energy companies are currently valued at a staggering 10% free cash flow yield with an outlook that is suggesting higher forward prices on oil and gas in the coming years as the world tries to plug the hole after Russian sanctions. Energy companies are massively profitable with 18% return on equity, but in our grotesque capital markets of 2022 investors are mostly talking about buying the dip in technology stocks. As we recently wrote in our note the inconvenient truth about energy and GDP the world will need a lot of oil and gas over the coming decade, so the investor outlook in energy stocks remains very positive. In his update he mention some of the largest energy companies in the world measured on market cap.