The Oil Surplus Could Persist. Expect Prices to Fall

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This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.

Expect Oil Prices to Fall

THINK Economic and Financial Analysis

ING
Aug. 18: Stubborn Russian oil output and weaker-than-expected demand growth mean the oil market is likely to remain in surplus for the remainder of this year and into early next year, which should limit the upside in oil prices. Time spreads also point toward a looser market, with the backwardation in the prompt spreads narrowing significantly in recent weeks.

As a result, we have revised lower our oil price forecast for the remainder of this year—although, given that inventories are at historically low levels, we still believe that prices will remain elevated, while limited OPEC spare capacity and uncertainty over how Russian flows will evolve once the EU ban comes into full force should also limit downside in the medium term.

We have lowered our third-quarter 2022 and fourth-quarter 2022 Brent forecasts from $118 a barrel and $125 a barrel to $100 and $97, respectively. Our full-year 2023 Brent forecast has been revised down from $99 a barrel to $97 a barrel.

Warren Patterson

Housing Hits a Roadblock

Macro Update

Ned Davis Research
Aug. 19: In the second quarter, the decline in residential investment subtracted 0.7 percentage points from real GDP growth, the most in two years. Starting the third quarter on a sour note, July housing starts dropped nearly 20% from their cyclical peak in April, the biggest three-month decline in 12 years, excluding the pandemic.

Home builder sentiment for August plunged to its lowest level since June 2014, also excluding the pandemic, raising concerns of a housing recession. [This] suggests a further weakening in construction activity in the months ahead.

On the demand side, the sharp drop in housing affordability this year has slowed housing demand, while the decline in mortgage applications suggests more downside.

The cyclical slowdown in housing will likely pull the broader economy in the same direction. Single-family home sales tend to lead retail sales by about six months and suggest slower consumer spending growth for the rest of this year.

Veneta Dimitrova

Assessing the mRNA Leaders

Insights

Harding Loevner
Aug. 18: The $38 billion to $40 billion in revenue that

Moderna

and

BioNTech

each expects to generate from the start of 2021 through 2022 likely represents their commercial high-water mark. It will also leave each with close to $20 billion with which to develop new drugs.

As Covid-19 becomes endemic, each company’s ongoing Covid revenue could amount to roughly $5 billion a year. Both will seek to shore up this base through new bivalent shots.

At this point, Moderna and BioNTech face little competition in mRNA, thanks to their co-exclusive license to a key aspect of the technology and their years of know-how in mastering mRNA’s many idiosyncrasies. While there is obvious overlap between their markets, Moderna and BioNTech are charting very different paths.

In BioNTech’s main area of focus—cancer—rewards are high, odds of success low, and the company’s early results only so-so. Still, the adaptability of its technology offers a high degree of promise.

David Glickman

S&P 500 Target: 4800

Market Strategy Radar Screen: Monthly Chart Book

Oppenheimer Asset Management
Aug. 18: We often say that there’s no “all clear” signal that sounds when it’s a good time to buy stocks. But for long-term investors and those with cash to put to work, the broad market at these levels offers opportunity. We can’t say that the market has definitively bottomed at these levels, nor that bear-market risk might not grind on for some time to come, but with so much bad news already seemingly priced in, the potential rewards of investing at these levels are looking more attractive relative to the risks.

Even in the face of uncertainty and the potential of risks of recession, our longer-term outlook for the U.S. economy and the stock market remains decidedly bullish. We believe that U.S. economic fundamentals remain on solid footing. Growth should begin to recover, supported by consumer demand and business investment and longer-term trends driven by technology and innovation….

We continue to expect that a growing U.S. economy will help power a global recovery as import demand draws in goods and services from around the world. We anticipate that positive corporate earnings growth, a key driver of equity valuations, will continue to show resilience in a challenging environment. On July 7, 2022, we initiated a price target of 4800 for the

S&P 500
by year-end 2022. Our price target is based on our earnings projection of $230 for the index for the year. Our price target assumes a price/earnings multiple of 20.9 times.

John Stoltzfus

Berkshire’s Latest Buys

Glenview Update

Glenview Trust
Aug. 16:

Berkshire Hathaway

added approximately $3.8 billion in net stock purchases to its publicly traded portfolio in the second quarter. Notably, a large portion of the investments were made in two energy companies,

Occidental Petroleum

and

Chevron
.
Despite the sharp price declines in stocks in the second quarter, Berkshire slowed the pace of purchases after adding roughly $40 billion in the first quarter.

Warren Buffett’s statement at this year’s annual meeting still seems apt: “Berkshire has not been good at timing. It’s been reasonably good at figuring out when it’s getting something good for the money. If anything, they sometimes want it to stay cheap so they can generally buy more if they like it.”

Buffett was true to his word, as every stock with increased holdings in the latest quarter was either a new addition in the previous quarter or had additional shares purchased in the first quarter.

Bill Stone

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