Three reasons why oil prices remain below $100 per barrel

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What we heard from energy stakeholders

Why are oil prices so far from their recent highs, even though there are still so many issues surrounding Iran and the Strait of Hormuz?

This is the question I get asked most often these days, and the immediate response is usually, “But oil prices can’t keep going down, can they?”

My take → I suspect these questions are coming from people who are secretly long oil and are shocked that oil is below $100 in the futures market.

No matter what position one takes, it is a natural question. Why is oil well off its highs? In May, oil prices suffered their biggest monthly decline on record. However, the battle is not over yet. Iran claims the US has broken the ceasefire. The Chinese military continues to fire missiles at US forces in the Middle East. Yemen’s Houthi terrorist group is now threatening to enter the region and harass ships. Every day brings new worries.

So why are oil prices in the mid-$90s and not much higher than $100?

There are three main reasons:

1: Genuine optimism that the Iran conflict/war will be resolved soon.

Iran needs oil because it brings in money. Iran has a huge economic incentive to return to some form of “normality.” Iran is an oil economy. Oil and natural gas are its economy. Without exports, we will go bankrupt. And without money, people are suffering even more than they have in the past 30-plus years. Even unarmed, these people will come to a breaking point, as whoever is currently running Tehran is no doubt acutely aware. They want this issue fixed and I hope it gets fixed sooner rather than later. And I’m no Pollyanna about this. I have said in the report that relations with Iran are far from peaceful, and given that there is a very angry rogue Revolutionary Guards boss with access to weapons, there is a good chance that fighting will escalate again. If that happens, oil prices will rise again. The world pays attention to the daily headlines.

My view → According to my sources, there is still a power vacuum at the top in Iran, and the world will probably hear conflicting comments and actions more frequently in the near future.

2: China’s demand is decreasing.

JPMorgan star analyst Natasha Kaneva released an eye-opening note this week. She reported that she had just returned from China and was shocked to see how much China’s oil demand had been cut. She writes:

“We spent last week in China, and the most striking takeaway from the meeting was not just that oil demand was down. It was that oil demand could have fallen by as much as 9%, or 1.5 million barrels. It was sudden, unexpected, and with very little visible disruption.”

1.5 million barrels a day may not seem like a lot, but in a country with more than 1 billion barrels of oil in storage, it’s important because it reduces drawdowns. This is also close to the amount of oil that Iran has historically exported every day. Kaneva said Chinese consumers and businesses may simply be moving away from gas-powered cars and trucks and toward more electric options such as EVs and subways.

3: The world is full of oil…and more is coming.

Now, back to the first question I always have. Where will oil prices go? Thanks for the question and the confidence, but I don’t know. Smarter people than me get it very, very wrong. Speculating on oil price movements is a dangerous game. My friend, the late Boone Pickens, was often asked about his oil price targets. Instead of giving a clear answer, he sheepishly gave ranges and directions, saying things like, “It’s more likely to go down than up.” Classic boom. So let’s borrow his strategy. I can easily argue for $50 oil over $150 oil.

Here’s why:

As Mr. Kaneba mentioned above, China is reducing its oil demand. It also has over 1 billion barrels of storage capacity. Saudi Arabia is actively pumping oil into the Red Sea through the East-West Pipeline. The UAE is rushing to build a second pipeline to bypass the strait. Now that the UAE has left OPEC, it is likely that the UAE will also try to increase oil production. Venezuela’s oil inflows are increasing, and Brazil and Guyana are also continuing to increase their volumes. And while global oil demand is still increasing, the pace of growth is slowing, even though production is likely to increase. Not to be outdone, U.S. production continues to slowly increase.

There is also the big issue of revenue from the Strategic Petroleum Reserve. SPR’s emergency reserves are draining at a rate of 8 million to 9 million barrels per week. This is an extraordinary pace, and when combined with oil sales during the Biden administration, reserves should be at their lowest level since reclamation began in 1983.

One last thing. Perhaps there’s a long-lost trader in me, but the market seems to be itching for prices to drop. Every time there is a crash, oil prices fall. Thankfully, the worst-case scenario has not come true. Let’s hope that’s not the case. Even President Trump has talked about falling oil prices, and in a phone call this week with my colleague Eamon Javers, he opined:

“Oil is going to fall like a rock very soon. Oil is going to be very low. There are 1,700 boats loaded with oil right now, and it’s going to be like an oil blowout. So I’m not worried at all, and people understand that, and I The only thing I care about, all I care about, at this point in my life, is that Iran won’t have nuclear weapons, and if they try to get new nuclear weapons, I’ll blow them up until the kingdom comes.”

I don’t know if these are market calming words, but let me be clear: the Iran war/conflict may not be over yet. Please stay hopeful. But remember that hope is not a strategy.

What if oil and bond yields remain high for a longer period of time?

So what does this mean for U.S. oil and oil companies? There are longer-term demands, the Barclays team wrote this week.

“Iran’s ability to re-weaponize the Strait and upend global trade flows is unlikely to be forgotten. Whether or not a lasting peace can be achieved, energy importing countries are expected to remain wary of Middle Eastern supplies and continue to support the indigenous security option of US supplies in comparison.”

Mizuho says there are still opportunities for some stocks even as commodity prices “go up,” but you need to be selective. Mizuho’s team sees “mixed valuations” for large oil-focused stocks, and advises focusing on some smaller companies. They highlight Devon (DVN), EQT (EQT), and Permian Resources (PR) as top contenders in that group. For large-cap stocks, Japanese bank analysts prefer Chevron (CVX) and refiner analysts prefer Phillips 66 (PSX).

Permian Resources isn’t a company that gets talked about a lot on Wall Street, but it just might. The Midland, Texas-based mid-cap stock is up an impressive 40% so far this year and 55% in the past 12 months. Analysts love stocks. Of the 19 analysts listed by FactSet, 17 have a buy rating and only two have a hold rating. The average price target is $25.60, indicating nearly 30% more upside potential. Raymond James analyst John Freeman is the most bullish, with a price target of $29. The dividend yield is also 3.33%. What’s unique about the company is that it has co-CEOs, both of whom founded Colgate Energy and merged with another oil and gas company four years ago to form Permian Resources.

My Take → For a $16 billion company, their PR website is surprisingly modest. We’re trying to find out if they like the media. Because my next call is to have them appear on my show, “Power Lunch” or here on “Power Insider.”

Beyond oil, the Middle East is an important region for natural gas and LNG. After Qatar Energy’s massive Ras Laffan production facility was hit by an Iranian attack in March, attention has turned to American companies to fill the production gap. As a result, Wolf Research named Cheniere Energy (LNG) as its new top choice. The company notes that high natural gas spreads have added “$5 to $10 per share in cash value” this year, and sees LNG gains of about 30%. Wolf’s Keith Stanley also believes that any resolution to the Iran war “counterintuitively would be a positive thing in refocusing investors on the value of long-term contracts.”

What’s interesting about Wolf’s call is that Cheniere is down about $70 a share from its late March highs, and the company sees its stock price returning to recent levels.

Cheniere’s average price target among all analysts is $303.45.

Matt Smith, director of product research at Kpler, reiterated his view that the battle is likely far from over.

This week’s Inside Line is Paul Prager, founder and CEO of TeraWulf.

Power Insider is all about energy in all its forms, and investors savvy enough to bet on it have made big profits this year. Here are this year’s best-performing energy and energy-related stocks with market caps over $1 billion. Winners range from LNG to AI power supplies, batteries and fuel cells.