$100 oil is the consensus but is a potential supercycle on the table?

Oil wants to go higher and higher — with the West Texas Instrument (WTI), the U.S. oil benchmark, up nearly 20% for the year. And the consensus on Wall Street is it can — as global oil production lags and a possible Russian invasion looms…

Party like it’s 2014

Last week, U.S. oil crossed $90 per barrel for the first time since 2014. Demand, which fell early in the pandemic causing massive production cuts, is strong and growing — with road travel rebounding. Meanwhile, oil production is slow to ramp up — and it may not return to pre-COVID for some time.

• OPEC+ countries cut output by ~10 million barrels a day in early 2020 — and are failing to fulfill output targets made in July.
• The Energy Information Administration expects U.S production to increase by 5.4% — well below 2019 levels.

Pioneer Natural Resources Co. (NYSE: PXD) — the largest oil producer in the US’ biggest oil fields — plans to increase output by less than 5% a year compared to 19% and 27% in peak years.

O&G companies flushed with cash

Oil & Gas (O&G) companies are winning over investors as they focus on returning capital back to shareholders through dividends and buybacks. While the S&P 500 is down 4% on the year and most sectors are bleeding, the Energy Select Sector SPDR Fund (NYSE:XLE) — which tracks companies from the O&G sector — is up 22% in 2022.

After plunging in 2020, oil exploration and production companies have mostly recovered and are stronger than they’ve been in years…

• Chevron (NYSE:CVX) reached a new high after increasing dividends and reporting a record $15.6B in net income in 2021.
• Exxon Mobil (NYSE: XOM), Occidental Petroleum (NYSE: OXY), Chevron are earning record cash flows.

O&G companies are expected to generate 5x as much free cash flow than they did in 2018 (Per WSJ) — the last year when oil prices were above $70. RBC sees us in a rare environment where oil demand is increasing and supply is decreasing — which could put us in an oil supercycle — one that could take us to $100 oil…

Investors: The consensus trade

It’s a consensus on Wall Street — with Goldman, J.P. Morgan and Morgan Stanley and UBS all calling for $100 on oil by September. As per Louise Dickson, senior oil market analyst at Rystad Energy (via CNBC), expect oil to keep trading high as “real supply shortages exist both in the short and long-term view”.

Catalyst: Russian troops are still hanging out around Ukraine’s border — and any conflict escalation or invasion could impact oil supply from Russia, one of the world’s largest O&G producing countries.