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Oil: Geopolitical risks ‘elevated prices a little bit more,’ strategist says

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Tortoise Portfolio Manager Rob Thummel joins Yahoo Finance Live to discuss oil price outlook, geopolitical tensions between Russia and the UAE, buying exposure through pipelines, the energy sector, and how oil supplies are trying to keep up with demands.

Video Transcript

EMILY MCCORMICK: Adam, let's talk about energy and commodities because many of these areas in the markets have been on a tear recently as energy demand, inflation, and expectations for higher rates have all been in play. And we're seeing a little bit of giveback during today's session, at least in crude oil prices. And for more on the market action, we have Rob Thummel, Tortoise portfolio manager joining us now. Rob, thank you so much for your time.

Starting off on crude oil, as I was mentioning, we did see some pullback in prices today but they're still up about more than 20% over the past six months, at least on WTI. Is there room for more upside in crude? And if so, what's going to be the driver of that?

ROB THUMMEL: Yeah, so Emily, so what you've seen in really all energy commodities is really fairly classic. So you've seen the global economy open back up, increase in consumption for energy-related demand and those commodities, and you simply haven't had supply catch up and keep up. So inventories have declined. And when inventories fall, prices rise. And so that's what you've seen.

Now, in oil, there's been a little bit of an additional element throw on this geopolitical potential conflict with Ukraine and Russia. That has elevated prices a little bit more. So where do I see oil prices going from here? Ideally we'd would love oil prices to remain here or even go a little bit lower because for global economic growth to continue, you don't want oil prices to rise too much. You want oil-- you want all oil-related products to remain reasonably priced, and if we get over $100 a barrel, that causes some concern with regards to longer-term demand for oil-related products.

ADAM SHAPIRO: Rob, if you have an investor who's considering putting their foot into the energy sector, what should they consider? Do they want to go after an actual extractor of the commodity, or would you want to go after someone like a Schlumberger-- and I'm not asking you to pick stock here, but someone who services those folk who are actually pulling gas and oil out of the ground.

ROB THUMMEL: Yeah, I might even go take a little different angle. So at Tortoise, we would say go for a midstream company in energy. And you might not know what that means, but that means-- that's a transporter of energy in the US. So globally, demand for energy is going up, right, and so, if you don't want commodity price exposure, buying a pipeline company is a great way to get exposure to the energy sector.

The reasons why are this. Number one, a lot of energy stocks, including pipeline stocks, pay a high dividend, right. High dividend income. The yield on a lot of energy in midstream companies is three or four times higher than the S&P 500. So that's a great place to get some income. You're also going to get growth on that income. That's important as well, especially if you're concerned about rising interest rates.

So from our perspective at Tortoise, we would say buy a midstream company with a 5%, 6%, 7% dividend yield. I think you're going to be pretty happy with that.

EMILY MCCORMICK: When we look at the S&P 500 sector performance-- I'm looking at it right now, and at the moment, the energy index is the only one that's in positive territory so far for the year to date, realizing, of course, that we are still only in January. We had a guest on earlier this week who said that this outperformance in the energy sector may be a little bit long in the tooth. But what's your opinion on that? Do you there's still potentially a little bit more room to run here, and is this outperformance justified?

ROB THUMMEL: Yeah, I think I'd take the other side of that trade. I think there's a significant opportunity for the sector to continue to outperform. And here's why. Look at the free cash flow yield of the sector. You know, with rising rates-- you've got rising commodity prices, you've got rising rates, you've got concerns about global economic growth. Well investors are going to be looking for free cash flow and free cash flow yields. And the free cash flow yield of the energy sector is three or four times higher than the S&P 500. And that's really important as investors really start to do their homework because not-- because you have to be very selective today, right, to make money in the market today.

You can't just pick anything. That was in 2020 and 2021. You have to be much more selective, and if you find stocks that have got some really good fundamentals that are still cheap from a valuation perspective-- which the energy sector is. Not a lot of other sectors are. That's where you want to go as an investor.

ADAM SHAPIRO: I want to get back to that dividend yield you were just talking about, you know, between 5% and 7%. Back in the day before the pandemic, you could look at oil stocks-- and I'm talking about the commodity. You could find dividend yield around 4%. But 5% to 7%, are you able to share with us who might have-- in those midstream who might have that kind of dividend yield?

ROB THUMMEL: Oh yeah, there's a whole host of them, companies like Plains All American, Ticker Symbols, PAA has got a really nice yield. Marathon's a energy infrastructure company. PLX, it's got almost a 10% yield. There are several others. Enterprise Products Partners there's another big market-- you know, almost a large cap company. Once again, 6%, 7% dividend yield. Williams Company, WMB.

I could keep going and talk to you about this for the next 30 minutes and list probably another 20 stocks with a 5% or higher dividend yield in the energy sector.

EMILY MCCORMICK: When we think about spot prices and, of course, crude oil futures, what do you think is the bigger driver right now of the price action? Do you think it's more on the supply side and what's happening with production, OPEC Plus, or do you think it's more on the demand side in this recovery story, pick up and travel and demand out of China, et cetera.

ROB THUMMEL: Now, that's actually a great question. And normally, demand drives the oil price. But over the last couple of years, it's changing. And it's probably going to change, and it's going to move from demand to supply-driven. So what's happened is supply has not kept up. So OPEC Plus has been trying to raise production and keep up with that higher demand. And frankly, not all the countries have been able to keep up with the forecasted supply increases. And so that's been a challenge and resulted in higher oil prices.

The US, right-- the US has decided that they're no longer going to grow production as much as they have historically. So that means less supply to the market as well. That capital discipline that US producers are displaying will remain in place. We won't see the US grow oil production significantly. So that's going to keep oil prices elevated for an extended period of time.

EMILY MCCORMICK: All right, we'll leave it there. Rob Thummel is Tortoise portfolio manager, and we thank you so much for your time this afternoon.

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