Good expectations for the oil prices
Analysts on Wall Street believe oil prices are on track to climb significantly beyond $80 a barrel in the coming months, potentially even surpassing triple digits as soon as next summer. These are their top stock picks amid an expected rally in crude markets.
Oil prices have already climbed more than 40 percent since the start of the year, supported by an easing of Covid-related restrictions, an uptick in goods transportation and increased air travel. But U.S. investment banks still see plenty of room to run.
Brent crude futures traded at $74.71 a barrel on Thursday, up around 0.1 percent , while U.S. West Texas Intermediate crude futures stood at $73.57, roughly 0.15 percent higher.
Goldman Sachs sees international benchmark Brent crude averaging above $80 in the third quarter, with potential spikes “well above” that level as demand comes roaring back. JPMorgan expects crude oil prices to “decisively” break into the $80s during the final three months of the year, while Morgan Stanley believes Brent will trade between $75 to $80 through to the middle of 2022.
Analysts at Bank of America, however, are even more bullish. They argue Brent prices could see $100 in the summer of next year. That would mark a return to triple digits for the first time since 2014.
“The simple thesis is that post COVID, demand is poised to bounce back whereas for a variety of reasons supply may not fully keep up, putting OPEC+ back in control of the oil market,”.
These are the stocks analysts on Wall Street expect to outperform as a result of this trend.
ExxonMobil: Analysts at Bank of America believe U.S. oil giant ExxonMobil is poised for a relative recovery after years of lagging performance. It lists the oil major among its “top ideas,” reaffirming a buy rating for the stock. Goldman Sachs, meanwhile, says underappreciated value in key upstream assets with an improving outlook in downstream in the coming quarters “should drive consensus earnings revisions.”
In the oil industry, upstream refers to the discovery and pumping of oil and downstream involves the processing of oil and gas, selling and distribution.
ConocoPhillips: According to Goldman Sachs, ConocoPhillips has the most upside among U.S. oil majors, with a 15% total return on rising oil prices. The stock is rated as a buy by Bank of America.
Occidental Petroleum: Goldman Sachs believes that Occidental Petroleum shares have the potential to outperform after a prolonged period of underperformance. The US bank cites balance-sheet improvement, earnings revisions for chemicals, and long-term growth for low-carbon projects. Analysts at Bank of America rank the company as one of their top picks.
Hess Corp: Analysts at Bank of America and Goldman Sachs both rate Hess Corp as a buy. The latter believes that the company is “uniquely positioned” to benefit from long-term oil growth in Guyana, which it believes is “favorably positioned” on the cost curve.
Diamondback Energy: Goldman Sachs analysts single out the Permian basin-focused shale producer, with recent acquisitions expected to drive favorable production and capital expenditure.
Devon Energy: According to Goldman Sachs, the U.S. oil and gas producer is well positioned to benefit from rising oil prices in the coming months, while also implementing transformative changes in corporate supply/cost returns.
Marathon: Credit Suisse analysts have set a target share price of $74 for the exploration and production company, up from around $60 currently. The stock is rated outperform by the Swiss bank.
Chevron: Credit Suisse has set a target share price of $126 for Chevron, up from around $104 on Wednesday. The bank rates the American oil company as outperform, noting that short-term risks to this rating include geopolitical risks and natural disasters such as hurricanes.
Phillips 66: According to Credit Suisse, an outperform rating for Phillips 66 is supported by a target share price of $95. Currently, the US refiner is trading at around $85 per share.
Crypto “alternative” investments
UBS isn’t a fan of bitcoin and other cryptocurrencies, characterizing them as a “speculative market” and advising investors to seek an alternative instead.
The Swiss investment bank stated in a note released on Monday that regulation poses a significant risk to digital assets.
China spooked bitcoin investors earlier this month by cracking down on cryptocurrency mining and trading.
Recently, the United Kingdom’s markets watchdog ordered Binance, a leading cryptocurrency exchange, to cease regulated activities in the country.
“We’ve long warned that shifting investor sentiment or regulatory crackdowns could deflate bubble-like crypto markets,” UBS’ global wealth management team wrote in a note.
“We believe that investors should avoid crypto speculation and instead consider risk-adjusted returns before investing in alternative assets.”
Investors interested in digital finance should look to the fast-growing financial technology sector, according to UBS, which calls fintech “one of the emerging sectors we believe may yield ‘The Next Big Thing.’”
“The prospect of large gains may entice investors, but we believe crypto speculation is a gamble, not an investment,” the bank said.
“Investors seeking exposure to digital payment assets should consider fintech, which we anticipate will benefit from structural growth.”
While the bank did not name any stocks, fintech companies such as Square and PayPal have seen significant gains in the last year, rising 140 percent and 74%, respectively. Meanwhile, payment networks Visa and Mastercard are up 23% and 26%, respectively. This is due, in part, to an increase in digital payment volumes during the coronavirus pandemic.
What is putting a strain on bitcoin?
Bitcoin is currently down about 45 percent from its April high of nearly $65,000. As of Tuesday, it was trading at around $35,835, up 4% in the previous 24 hours.
The world’s largest digital currency had benefited from an influx of institutional investors who had abandoned gold in favor of bitcoin as an inflation hedge. However, this trend appears to have recently reversed.
According to UBS, a number of other factors are weighing on bitcoin. It alluded to reports that Boston Federal Reserve President Eric Rosengren called tether — a contentious stablecoin tied to the US dollar — a financial stability risk.
The bank also brought up the case of Africrypt, a South African cryptocurrency exchange whose founders are said to have vanished, taking $3.6 billion in client funds with them.
“While the pandemic may ensure that financial repression continues,” UBS said, “we believe crypto speculation poses its own risks to your wealth.”