…The evidence is increasingly pointing to this potentially being a secular bottom in commodities and energy stocks in particular. In fact, we think 2018 will be the year of the commodity bull.
The original article has been edited here for length (…) and clarity ([ ]) by munKNEE.com to provide a fast & easy read.
Below is the evidence to support this forecast:
1. We have commodity valuations relative to stocks at 100-year lows.
2. Commodity pricing relative to stocks tends to follow a full 15.5-year cycle. We’re at the trough of the current cycle — a point that has marked the start of the last three commodity bull markets.
In late August, at a time when WTI crude was trading around $46bbl and most market players were calling for a return to the $30s, we turned outright bullish on crude oil and energy-related stocks…and since then it is up 30% to +$60bbl where it is today.
…Typically after a 30% rise over a short few months, a bullish narrative becomes popularized and widely adopted but we have yet to see that. Instead, despite this run-up in oil, we’re still hearing primarily bearish takes on the sector with traders looking to call a top after every rise. This is all the better because the greatest bull runs climb a mountain of disbelief and that is what we’re seeing here.
We are at a long-term inflection point for commodities:
- Global growth continues to surprise to the upside, which we expect to continue in 2018.
- Inflationary pressures are starting to build which will become apparent next year (note: we don’t expect “bad” as in high rampant inflation, but we expect stronger, around 2% inflation to persist towards the second half of the year) and beaten down commodity/value stocks do well in this environment.
- There is potential for a new infrastructure spending bill here in the U.S.
- We are seeing increasing expansionary policies in other parts of the world (i.e. India) and, then,
- there is the wealth S-curve
All of the above have the makings for a large secular bull market in commodities that’s ready to get started.
We think 2018 will be the year of the commodity bull. We expect WTI crude oil to climb over 20% higher and finish the year above $75bbl. This will drive energy stocks up by multiples, and the energy sector will finish the year as one of the best performing sectors.