Recent Covid Data

BearTraps research reports that hospital pressure has yet to pick up substantially in either London or Denmark despite that Omicron began to spread decisively there around three weeks ago. Each day that passes without large pickups in hospital pressures (or fatalities) increases the probability that South Africa’s encouraging template will hold true for London and Denmark, where populations are older but more vaccinated. This bodes well for the USA and Canada. Most sources are suggesting that this new virus is similar to a common cold in symptoms and danger. Here, and here are examples of these sources. Still, we might expect the media to hype even this less serious virus to milk as much click-bate and headline fear as possible.

Whatever the case- so far, the signs are very encouraging, especially the very low pressure on ICUs, which mirror the trend from South Africa. It is likely that health officials will change tune over the next 1-2 weeks, in response to this better data.

So – we have a very real probability of major economies re-opening from lockdowns in a month or so as the reality of a lower danger virus sinks in. Media hype and governments will fight to hold on to the fear, but it is inevitable that this crises will be shorter than the others. This will release the consumer back onto the streets. Another wave of spending, travel and entertainment will erupt – all in an environment of a labor shortage.  That means higher wages enticing that labor back to work. But wage inflation is only part of the problem.

The second problem is the supply chain. The poster boy for supply chain issues is easy to pinpoint: all the cargo waiting offshore. According to the Marine Exchange of Southern California, 637,329 TEUs (full containers) were floating nearby in early November. That number increased to 745,305 TEUs by month-end. The queue continues to grow this month and is 794,962 TEUs now! The problem is growing, not improving. Wait until the lockdowns dissipate!

This problem is not contained to North America. In fact, exports from the USA are at record levels. Worldwide demand for supply is spiking. Don’t believe far-left Democrats like Elizabeth Warren who blame rising grocery pricing on “greedy executives of grocery chains” or Biden who blamed rising gas prices on those darned energy producers. The current situation is a world-wide supply chain issue, and not caused by “greedy corporations and executives”. I wish it were a requirement for a government official to have a degree in economics – or at least a background in business. Or a minimum IQ level.

Supply/demand are simple concepts, yet they use every opportunity to blame wealthy people or successful corporations for every problem. Heck, even our left wing boy in Canada has admitted it is a worldwide supply problem. He and his “finance minister” only have liberal arts degrees (you can’t make this stuff up) – so kudos for them to have any idea of what is going on.  Something you cannot say about the US President and staff. Its a world, word mad, I tell you. Below are the export numbers. Wow!

An argument for oil

I get asked about oil frequently lately. Should we still hold oil stocks? Well, for one thing, I continue to reiterate that inflation (per above) will drive oil prices higher in the coming year. Why? Oil demand has returned to pre Covid levels. See the chart below. Rising oil demand is a no-brainer after a recession. People start to commute, travel and produce goods again, all of which requires crude. And usage has not yet peaked.

According to the U.S Energy Information Administration, “global oil consumption is rallying back and is poised to accelerate to 101.2 million barrel a day in 2022, topping pre-pandemic levels“!

So, we have rising demand. But… the supply of oil is lower than 2019. The IEA (International Energy Association) chart below shows their correct projection for 2021. This trend is expected to continue into 2022 per the US Energy Information Administration comments noted above. And that’s the combination that keeps me in the trade so long as the major trend doesn’t break on the charts. That break has not happened, despite the recent volatility.

As far as the energy stocks, producers haven’t even reached their 2019 price levels. That’s not taking into account the fact that energy supply was readily available in 2019! This is important folks!!! We could see oil get back to $100 easily from $70 now. And energy stocks, per the XEG chart below, are likely to reach and possibly exceed their 2019 levels – which were 20% higher than today at around $12.

Heck, if we take supply problems into consideration, usage increases, population growth, and migration to more rural locations by workers fleeing cities since 2020 (meaning less public transit, more driving time)- we have a case for even greater consumption levels than in 2019. And no, we haven’t all bought Tesla’s yet. Oil matters.

What does that mean to oil stocks? Well, $12 for XEG as a start. But XEG has seen $17 many times since 2004 – per the chart below. That level of technical resistance discounts the irrational “peak oil theory” spike by XEG to $20+  in 2008 (which I write about in my recent book “Smart Money Dumb Money”). I’m targeting $12 minimum, with a “who knows?” target of $17.

So – to answer the question regarding do I still hold oil? Yes.  I do not own XEG, but I do own oil/gas stocks. The trend is up, price targets are about 20% ahead of here (and who knows..perhaps higher). The fundamentals make sense, supply chains are tight, oil production is behind schedule. And electric vehicle conversion is not here in full force for a while.

Happy holidays to all of my readers, and I will be back next week with my yearly rant blog.