Rare Sell Signal As Everyone Is Invested

Demand Is Coming Back

This may be a classic case of the market overextending itself and then correcting. Demand for travel and energy will increase later this year. There is about to be a huge amount of pent-up demand for leisure and hospitality this summer. We have seen anecdotal evidence of various employers in the country offering bonuses and higher pay to entry level workers in this industry. We’ve even seen bonuses given out just for good attendance. As you can see from the chart below, month over month flight and hotel searches by US residents were up 46% and 10% in March. In March, Booking.com’s visits were up 16.86% monthly to 261.25 million.

The spike in energy demand is going to end the glut in oil. As you can see from the chart below, oil inventories in June 2021 should be about 270 million barrels above the historical average. The glut should fall to about 50 million barrels by next February. Stocks react quickly, but an actual return to normalcy in the oil market will take a few quarters. The trend is up, but there will be corrections along the way. The uptrend will be driven by long term demand growth from emerging markets combined with the decline in investments in new fossil fuel projects due to low prices and the shift to renewable energy.

The chart below details why we will see a decline in inventories in the next couple months. Global crude demand is projected to be over 100 million barrels per day by the end of June. It’s important to study the historical data. Oil is called a dead industry, yet demand has steadily grown since 2003. The problem for oil prices in the 2010s was excessive supply due to shale. Following that supply shock, we had the COVID-19 virus which was a huge shock to demand. This led to the worst decline in energy stocks in 90 years.

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