Oil is going to $50.
Or it’s going to fall all the way down to $20.
Or is it?
If you follow oil prices at all, the last few weeks would have you believe that the world is awash in oil all over the world, demand was declining, and renewable energy was cheap and easy to build.
None of that is the truth.
Here’s what’s actually happening…
And how you can play it.
The International Energy Agency said earlier this month that it expected oil demand to surge, thanks to increased air travel and the continued reopening of China. As a result, the agency expects global demand to exceed supply starting in the second half of 2023.
More demand than supply leads to higher prices, according to any introduction to economics textbook.
This is not going to be a short supply-demand cycle either. While I am all too aware that the pundits and alleged energy experts would have you believe that renewable energy will be our primary fuel source and that we will all drive an electric vehicle by next Christmas, that is not the case.
According to the Energy Information Agency here in the United States, we will still use more oil and more gas than we do renewable energy. In its 2023 Energy market outlook, the agency said that while renewable energy will be the fastest-growing fuel source in the coming years, we are still several decades away from it being the primary fuel source.
The Energy Information Agency also suggested that while government officials are talking about 100% electric vehicles, the actual percentage of electric vehicles sold will be about 30% of all cars purchased if oil prices are at a high level, or less than 15% if gas is cheap.
All the campaign trail and Green New Deal hollering about renewable energy and EV usage simply are not true—we will be using oil and gas for decades.
If I am right about that (and I am), then oil and oil-related equities are cheap.
I am not the only one who thinks this is the case. A guy you might have heard of named Warren Buffett has a pretty decent record of identifying undervalued industries and companies. And he has been buying energy stocks hand over fist in recent months.
Buffett’s largest recent purchase has been Occidental Petroleum (OXY), and he keeps buying more shares when the price falls: last week, he added an additional $466 million worth of shares to his position. The week before, he spent $354 million on Occidental shares.
Berkshire now owns about $12.5 billion worth of Occidental shares.
Buffett is not buying Occidental and its collection of oil-producing, storing, and marketing assets because he thinks oil’s long-term price will decrease.
Occidental just raised its dividend by 38% and announced a new $3 billion stock buyback. The company also plans to use some of its free cashflow to redeem its preferred stock. This is on top of the $3 billion buyback plan Occidental completed in the fourth quarter of 2022.
Apparently, Ocidental’s board does not think oil prices are falling anytime soon, either.
Executives at Devon Energy (DVN), the large oil and gas exploration and production company, also have signaled with their checkbooks that they think oil and gas prices will move higher and create free cashflow for the company.
CEO Richard Muncrief has made open market purchases of almost $1.2 million of Devon Energy shares in the past two weeks. The company’s chief operating officer bought almost $1 million last week as prices fell. And one of the directors of its board bought just shy of $250,000 worth of stock.
Devon Energy is a free cashflow machine that generated $6 billion in excess cash last year.
The company uses the cash to reward shareholders. It just raised the dividend, and the stock now yields more than 10% after the recent pullback.
Devon has also been buying back a lot of stock, with $700 million left on a $2 billion buyback authorization. The company increased the buyback amount twice last year; additional increases in 2023 will not surprise me.
Insiders are not buying because they think oil and gas prices will decrease.
Both the International Energy Agency and the US-based Energy Information Agency think oil and gas demand will decline over the next several decades.
Warren Buffett is making a massive bet on oil prices rising long term.
Energy prices may be volatile, but buying energy companies and assets at current valuations should deliver spectacular long-term returns for patient-aggressive investors.
This post originally appeared at Investors Alley.