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Crude Oil Outlook for 2020 and 3 Energy Companies Gurus Agree On

The energy markets are constantly being watched by investors, analysts and economists to evaluate global economic conditions and to identify potential investment opportunities. Crude oil is one of the most-followed energy sources in the world as the price trends tend to provide meaningful insight into where the economy is headed. Energy prices generally correlate positively with global economic growth and, as the chart below illustrates, oil prices have crashed during recessionary periods in the U.S., which are marked by the grey areas.


Staying invested in oil contracts or energy companies during these recessionary periods would have led to significant losses for investors, which makes it all the more important to assess where oil prices are headed in 2020.

Fears of a global economic slowdown are overblown; good news for oil

Over the past couple of years, many investors have worried the trade war between the U.S. and China would negatively impact global growth, as these two countries are the largest economies in the world. However, the latest data reveals that both regions are seeing better-than-expected growth. For instance, the U.S. Bureau of Economic Analysis confirmed in early December that the American economy grew at an annualized rate of 2.1% in the third quarter, beating expectations of a 2% improvement. On the other hand, in China, the Caixin/Markit manufacturing purchasing managers' index for November was reported at 51.8, up slightly from 51.7 in October. Any reading above 50 indicates an expected expansion in manufacturing activity.

As expected, this increased level of business activity resulted in higher demand for oil. According to data from the International Energy Authority, global oil demand in the third quarter grew by 1.1 million barrels per day. China was the largest contributor to this growth with an increase of 640,000 barrels on a year-over-year basis.

On the back of successful trade negotiations between the U.S. and China, IHS Markit now projects the global economy will grow 2.5% in 2020 and 2.7% in 2021. In its annual Top-10 Economic Predictions report released last Friday, the company confirmed that global recession odds are falling due to the latest geopolitical developments.

While this is good news for oil markets in general, the decelerating growth rates in China and the maturing nature of emerging market economies are not positive developments. A drastic decline in oil prices, however, cannot be expected in 2020 based on these forecasts.

Production cuts continue; more good news for oil

On Dec. 6, OPEC agreed to deepen production cuts by an additional 500,000 barrels a day through March 2020. Along with this decision, Saudi Arabia's Energy Minister, Prince Abdulaziz bin Salman, confirmed the country would extend a voluntary cut of 400,000 barrels a day as well. This brings the total reduction in output to 2.1 million barrels a day.

This reduction in supply is meant to stabilize oil prices and prevent a sharp decline of a similar nature to what happened in 2014-15. Neil Beveridge, an energy analyst at Bernstein, commented on this decision in a note:


"While we await full details from OPEC and non-OPEC, we think a 0.5MMbls/d announced cut relative to existing quotas is just enough to keep markets balanced for 2020."



Analysts from Goldman Sachs, Saxo Bank and Jefferies also shared Beveridge's view that oil prices would be stable in 2020. This is good news for energy companies as they were looking at declining prices for the next couple of years, which would have eroded profit margins.

All eyes are on the March 2020 meeting in Vienna, in which OPEC will decide on the level of oil supply for the remainder of the year.

Inventories are piling up; bad news for oil

The American Petroleum Institute releases inventory levels of U.S. crude oil on a weekly basis, which shows how much oil is available in storage. If the increase in crude inventories is more than expected, it implies weaker demand and is bearish for crude prices, and vice versa.

The latest data released on Tuesday reveal that the stockpile rose by 4.7 million barrels in the week ended Dec. 13, in contrast to the expectation of a drawdown of 1.28 million barrels. This is bad news for energy companies as it indicates a worse-than-expected slowdown in demand. However, this could be the result of many multinational organizations keeping their capital investments in check until the U.S.-China trade deal is signed in January. Therefore, weekly data in January will provide a much better idea of where oil prices are headed.

Average price targets

Investment banks, economic data providers, central banks and research firms release their expectations for crude oil prices on an annual basis. While there could be differing opinions about the price, many of these institutions and individuals generally agree on the broad market direction. The below table provides the projections for 2020.

Institute/bank

The price target for WTI crude

The price target for Brent crude

JPMorgan

$59

$64.50

Goldman Sachs

$58.50

$63

U.S. Energy Information Administration

$55

$61

Emirates NBD

$55

$57

Capital Economics

-

$70



Source: Company websites and published research documents.

In summary, WTI Crude is expected to trade close to $56, whereas Brent is projected to trade in the mid-$60s, suggesting that oil prices will remain stable without any significant upside or downside in 2020. The underlying assumption is that the weakening demand will be offset by supply cuts.

Even though this is not very exciting news for energy investors, there are many companies that can generate attractive returns at these prices.

Three companies to look out for in 2020

As revealed in the previous segments of this analysis, there are both positive and negative developments for the crude oil market in 2020. According to analysts, the likely outcome will be stable prices. The end result is not entirely a bad one for energy investors and companies. This could be one of the reasons why gurus are investing in this sector. To followe is a summary of three energy companies currently being backed by gurus.

Occidental Petroleum Corp. (NYSE:OXY)

The company engages in the acquisition, exploration and development of oil and gas properties internationally. The company completed the acquisition of Anadarko Petroleum in August, which attracted criticism from many investors and pushed the share price lower. This has created an opportunity for value investors. Below are a few of the gurus backing the company.

Name

Investment value

Warren Buffett (Trades, Portfolio)

$332.1 million

Carl Icahn (Trades, Portfolio)

$1.17 billion

Ray Dalio (Trades, Portfolio)

$11 million



Source: 13-F filings

Based on estimates from eight analysts covering Occidental, shares have a median target price of $55, which indicates an upside of 41% from the stock price of around $38.94 on Wednesday.

Suncor Energy Inc. (NYSE:SU)

Suncor is an integrated energy company headquartered in Calgary, Alberta. The main business focus is on transporting and refining crude oil and marketing petroleum and petrochemical products primarily in Canada, which accounts for 60% of operations. The refining operations have a capacity of 462,000 barrels a day.

Further, Suncor is developing one of the world's largest petroleum resource basins in Canada's Athabasca oil sands, which accounts for 40% of revenue. The company estimates it holds approximately 7.5 billion barrels of proven and probable crude oil reserves, which is expected to last more than 30 years.

Here's a list of gurus who hold Suncor shares.

Name

Investment value

Warren Buffett (Trades, Portfolio)

$339.7 million

Ray Dalio (Trades, Portfolio)

$19.2 million



Source: 13-F filings

Analysts have a median target price of $37.77 for Suncor, indicating an upside of 17% from the share price of around $32.22 on Wednesday.

CVR Energy Inc. (NYSE:CVI)

The company engages in petroleum refining and nitrogen manufacturing activities in the U.S. It owns two refinery plants with an output of over 206,000 barrels per day, producing gasoline, diesel fuel and liquefied natural gas marketed primarily to the Midwest. The company's subsidiary, CVR Partners, was spun off in 2007 to produce nitrogen fertilizers. The company's net income has grown by 23% in 2018 and 14% in the trailing 12-month period, which highlights the strong earnings power of CVR despite challenging oil prices.

Carl Icahn (Trades, Portfolio) owns just over 12% of CVR Energy. His position is valued at $3.1 billion. Analysts have a target price of $44 for CVR shares, indicating 6% upside from the market price of around $41.50 on Wednesday.

Takeaway for investors

Macroeconomic indicators and analyts point to stable oil prices in 2020. This is a positive outcome for energy companies as it was previously believed that trade tensions would lead to a much slower economic growth, resulting in a significantly negative impact on demand for oil. Following in the footsteps of gurus by investing in high-growth energy companies could lead to attractive gains in 2020. All the companies mentioned are committed to paying dividends as well, which would improve the total return for shareholders.

Disclosure: I do not own any stocks mentioned in this article.

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This article first appeared on GuruFocus.