Oil markets on track for new all-time highs

WTI rises above $120 on tightening supply

• The case for higher Oil (NYSEARCA: USO) prices continues to strengthen and is now pushing WTI oil above the $120 mark.

• The latest news includes news from the EU of a partial ban on Russian imports.

• The ban will include most oil and gas products and would be put into place by the end of the year.

• Products delivered by pipeline are exempt due to opposition from Hungary, a country deeply dependent on Russian energy.

• Russia, understandably, fired back at the move saying it would find other buyers for its crude although who is still a question.

• The takeaway for the market is that a tight supply/demand situation is getting tighter. 

And the EU will have to find other sources for its energy as well. The EU imports more than 35% of its oil from Russia so it is no small amount we are talking about. The U.S. has pledged support but sending more domestic products overseas will only accelerate higher prices for WTI later in the year. On a technical basis, a move up to retest the all-time is not a surprise due to the extreme peak set during the last breakout. The risk for the market now is that market momentum will carry the price of WTI into new all-time high territory and spark another wave of speculation. In that scenario, WTI could easily move up into the $150 to $200 range.

The analysts are driving energy stocks higher

As bad as higher energy prices are for the broad economy, inflation, and the consumer they are a source of windfall profits for energy companies, and the analysts are taking note. Fully 7 of the top 10 and 13 of the top 20 most upgraded stocks of the Q1 reporting season are energy stocks and the upgrades keep rolling in. The latest activity includes price target increases for Occidental Petroleum (NYSE: OXY), Conoco Philips (NYSE: COP), and Chevron (NYSE: CVX) and we don’t think this is the end of the trend. With energy prices still on the rise and demand unsated the expectations for profits is on the rise as well and that will keep the sector moving higher.

Turning to the earnings, the Energy Sector (NYSEARCA: XLE) produced 268% EPS growth in Q1 and that kind of strength is expected in Q2 and Q3 as well. While the comps will get tougher, the price of oil has been trending at the highest levels in over a decade and is now at the top-end of the range. The consensus for Q2 is a slightly tepid 195% but that target is up 4700 basis points since the start of the quarter and it is still rising. Assuming oil prices remain at or near their current levels we think the consensus target for the Energy sector will rise into the start of the season and the sector will outperform it. Regardless, the Energy Sector ETF is going ballistic and well on its way to retesting the all-time high. That move is worth more than 10% without the dividend and we think the ETF will move up into new all-time high territory.

Will higher oil prices force the Fed to act even more aggressively?

The answer to the question, will higher oil prices force the Fed to act aggressively, yes. Oil is the most widely used commodity on the planet and a leading cost for everything consumer spending can buy. With oil prices on the rise, we are certain we’ve not seen the end of inflation and that will force the Fed to act. The latest word from the Fed is that rates will most likely move past tightening and into restrictive territory before inflation cools which is a recipe for recession.