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According to JP Morgan, we are facing a rise in oil prices. When will it happen? How can investors benefit?

Jamie Cameron
26. 4. 2023
4 min read

In the past year, we have seen a rapid rise in oil prices, with all companies around oil benefiting from this rise. But you definitely shouldn't sell these stocks. In fact, according to JP Morgan, there may be another potential oil price spike ahead.

Historical data suggests that since 1988, Fed rate hikes have been followed by an average 9% increase in the price of Brent crude oil. With the Fed rate hike expected in May and the subsequent pause, analysts at JPMorgan believe that oil prices are poised to rise. In this article, we look at the ways investors can profit from this situation.

The main conclusion: if the Fed pauses its rate hike campaign soon, the most likely scenario is that oil will do well.

JPMorgan forecasts the price of Brent crude to rise to $94 per barrel in the fourth quarter, up 9.5% from current levels. Markets expect the Fed to raise rates in May by another 25 basis points to a target range of 5-5.25%. If this materializes, the historical correlation between rates and oil prices could suggest an opportunity for investors.

However, if the U.S. experiences only a mild recession or lands softly, a new bull market may already be forming.

In the past, after Fed pauses in 2000, 2006 and 2018, oil prices eventually went into negative territory, followed by recessions. JPMorgan predicts that a mild recession or soft landing may lead to the formation of a new bull market in oil. Analysts expect a recession in late 2023 or 2024 and inflation around 4% in 2023.

Oil demand should remain resilient, analysts say, as fuel needs remain elevated and U.S. commercial crude inventories begin to decline.

How can investors profit from this?

There are several ways to profit from the rise in oil prices. It's virtually the same as last year. So those who haven't sold their oil stocks may see further gains. But let's recap the possibilities.

  • Investing in energy companies: investors may consider investing in stocks of energy companies that focus on oil production and distribution. These companies can enjoy increased profits due to the rise in oil prices. Examples of such companies include Exxon Mobil $XOM-2.0%, Chevron $CVX-1.5%, Occidental petroleum $OXY-1.1%.

Investing in these companies can be attractive due to their strong market position, ability to generate stable cash flow and history of paying dividends. Before investing, however, it is important to conduct thorough research and consider the risks associated with each stock.

  • Investing in oil ETFs: An alternative option is to invest in oil ETFs (Exchange Traded Funds), which track the performance of a basket of energy companies or the price of oil itself. This strategy allows diversification and reduces the risk associated with investing in individual stocks. Examples of oil ETFs include the Energy Select Sector SPDR Fund $XLE-1.9%, iShares Global Energy ETF $IXC-1.8%.

Investing in these funds can provide exposure to the energy sector without having to own individual stocks.

  • Investing in alternative energy sources: over the long term, rising oil prices may contribute to increased interest in alternative energy sources such as solar, wind and electric mobility. Investors may consider investing in companies in these sectors that can benefit from the growing demand for cleaner energy sources. Examples of such companies include NextEra Energy $NEE-0.8%, Vestas Wind Systems and First Solar $FSLR+18.7%.

Investments in these companies can provide diversification and long-term growth potential given the expected increase in demand for sustainable energy solutions.

When investing in energy companies, oil ETFs and alternative energy sources, it is important to consider the risks associated with oil price volatility and geopolitical events. One of the key things investors should keep in mind is that the energy sector is exposed not only to cyclical changes, but also to structural changes associated with the transition to low-carbon energy sources.

In conclusion, the current situation in the oil market and the expected Fed rate hike present potential opportunities for investors who are willing and able to react quickly to market changes and profit from investments in energy companies, oil ETFs and alternative energy sources.

WARNING: I am not a financial advisor, and this material does not serve as a financial or investment recommendation. The content of this material is purely informational.

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