The largest development this week was the oil price approaching $100 per barrel.

It’s an important psychological level for most investors. They closely watch global energy prices and use them in their macro outlooks.

While oil has been on a tear lately, questions remain…

  • Would this be a sustainable long-term rally?
  • Is there any time left to take advantage of this trend?…
  • …or is a correction in energy prices imminent?

Let’s dig in.

What Happened with Oil in 2023?

At first, oil prices started rising due to supply disruptions. Many oil producers shelved their development plans during the COVID pandemic. Demand was weak then, and oil prices collapsed due to the grim economic outlook that prevailed.

Today, as a lagging effect, markets are still experiencing a gap in new oil supply. The global shift to clean energy sources drives capital away from fossil fuels. As a result, the energy sector turned into an underdog, with many large investors looking elsewhere.

Also, on top of the COVID-related supply issues, the Organization of Petroleum Exporting Countries and Russia (OPEC+) made things worse. Some OPEC countries cut their output and kept it constrained longer than expected. This way, the cartel aims to boost its revenues while keeping production volumes low.

OPEC interventions usually don’t last too long because the cure for high prices is high prices. With oil prices still strong, more supply will come to the market. The projects that weren’t making much money at $40 per barrel can now become high-margin assets.

This will increase supply and balance the market. In other words, we’re not expecting oil prices to keep growing or stay high for much longer.

A correction is the most likely outcome. It’s not enough to just limit the supply. The economy has to provide strong demand to keep prices higher for longer.

That was the case in the early 2000s when China’s economy grew by leaps and bounds—no such growth in the global economy today. In fact, some countries even posted a decline in their gross domestic product (GDP) growth.

There is insufficient support for a substantial long-term rally in the oil prices, in other words.

And Then There’s Clean Energy

Don’t forget about the shift toward clean energy sources. This trend is inevitable. In a matter of a few decades, fossil fuels may become a history. The world is shifting to clean energy sources at a rapid pace.

Bloomberg estimated that oil consumption would reach its peak in 2027. Then, it expected a steady decline, dropping by 20 million barrels per day in consumption by 2040. It’s roughly 20% of the overall oil demand today. Other experts agree.

Don’t feel bad if you missed this surge in energy prices. It is unlikely to last long. If you have positions in the energy sector, maybe it’s a good time to take profits and redeploy your capital.

At the Financial Star, we prefer sectors with stable long-term investment outlooks—the ones with decades of potential growth.

Rather than trying to catch the latest flavor of the day, think about what will be a fundamental driver of the global economy in the coming years. We believe clean energy transition, and critical minerals, in particular, have much better odds of delivering positive results to investors.

We could see more spikes in the price of oil along the way, but timing them will be difficult, if not impossible. Most of these will end up with a healthy correction. Don’t fall into this trap and stay on the right path.

Thank you for your loyal readership,

The Financial Star team