Oil prices have fallen sharply from their recent peak, according to Bill Smed, chief investment officer at Smed Capital Management, but the case for buying oil stocks remains.
That’s because energy prices are likely to remain higher or even rise, he told CNBC’s “Street Science Asia” on Thursday.
He described the fall in crude oil prices as “the first significant correction” in a bull market that began in the spring of 2020, following the fall in prices.
“You have this huge step up, you go from $20 a barrel to $120 and then you pull back — and now people are going, ‘Oh yeah, it’s all over, it’s right there to push inflation. going to fix that,” Smed said.
But several factors suggest that prices are about to rise, he said.
The US would have to replace 180 million barrels of strategic reserves that had been depleted to meet demand, and supply remains tight, he pointed out.
“What happens when China’s economy opens up completely … get out of their quarantine and just get out,” he said, suggesting that demand will return again.
The COVID outbreak in China has prompted lockdowns this year, and has led to a drop in energy consumption in the world’s most populous country.
Demand is likely to return when more movement restrictions are eased.
“We like oil stocks here. You can buy them here, Warren Buffett is buying it here,” Smed said.
Brent crude futures and US West Texas Intermediate futures both hit levels above $120 a barrel this year, but are now at $96.88 and $90.88 a barrel, respectively.
Still, both benchmarks are up 40% from a year ago.
— CNBC’s Thomas Frank and Yun Lee contributed to this report.