Oil stocks are surging in 2021 but these factors could derail a bull run

After surging more than 30% in 2020, oil stocks are still finding themselves stuck between an oil shale and a hard place.  Oil demand is swinging as different countries struggle with COVID outbreaks:

• Europe – the EU is planning to ease restrictions for vaccinated travelers, which could increase the demand for oil.
• India, the third-largest oil-importing country, is still dealing with its worst increase in COVID cases.
• In the US and China, oil demand is nearly back at their pre-COVID levels.

Oil giants are back in the green

Oil companies that struggled during an 80% decline in oil prices at the start of 2020 are finally seeing a turn of fortune. Last Friday, several oil producers including ExxonMobil ($XOM) and Chevron ($CVX) reported their first quarter of profitability since the start of COVID.

• Chevron and Shell ($RDS) increased their dividend for the second time since cutting it by more than half in 2020.
• Energy Select Sector SPDR Fund ($XLE), an ETF that holds many of the largest oil producers, is up 33% in 2021.

The bull case for oil prices

Oil prices jumped 30% in 2021 and are now back at their pre-COVID levels. Looking ahead, analysts are expecting a short-term mismatch in oil supply and demand that could lead to further increases in oil prices.

• Goldman is predicting an additional 13.5% rise in commodity prices over the next 6 months from greater energy usage.
• Christyan Mak, an analyst at JPMorgan, believes that a potential shortfall of $600b in capital expenditure by oil companies could lead to a jump in oil prices.

But many are also arguing that increased prices are temporary and other factors could send prices down in the long run…

For investors… The long term outlook for oil stocks

While oil stocks are looking cheap on valuation metrics (i.e. price-to-earnings multiples), there are also several things that could derail an oil price bull run and lower oil prices…

• A decision to increase supply — which has been kept low during COVID — from major oil producers (i.e. US, OPEC, Russia)
• A shift towards renewable energy — with Biden pledging to cut US emissions by 50% by 2030.

Looking even further, the fall of oil could send another industry into the spotlight — climate tech.

Learn more: Could oil be headed for a supercycle? What is a supercycle anyways?