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Why Oil Keeps Rising Even as Other Commodities Pull Back

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A pump jack operating in Eddy County in New Mexico.

Paul Ratje / AFP via Getty Images

Prices of commodities like steel and corn have pulled back from the highs they hit last month, but oil has continued to climb, buoyed by signs of increasing travel around the world and new pressures on supply.

Brent crude futures, the global benchmark, were trading 0.4% higher, to $70.56 a barrel, on Wednesday. West Texas Intermediate futures were up 0.3%, to $67.94 a barrel.

Oil has risen for some of the same reasons as other commodities — the speed of the reopening and supply shortages in some areas.

But other factors are also at play that may prolong the oil rally even as some other commodity prices have begun to decline. Morgan Stanley analyst Devin McDermott wrote in a note published Wednesday that political dynamics were likely to cap the growth in oil supply even as demand continues to rise in the years ahead.

The International Energy Agency recently wrote that oil-and-gas companies would have to keep their capital expenditures at or below 2020 levels for the world to achieve net zero carbon emissions by 2050. McDermott expects public company shareholders will demand that companies adhere to this rule.

Exxon Mobil

(ticker: XOM),

Chevron

(CVX), and

Royal Dutch Shell

(RDS. A) all faced reckonings last week over their climate impacts, and the pressure will only grow.

Demand, however, may not drop as much as supply — though there is a robust debate going on about whether demand has already peaked or could keep rising for at least another decade.

Morgan Stanley oil strategist Martjin Rats expects demand will keep rising to 107 million barrels a day by 2033, from 100 million barrels at the start of 2020. To satisfy that increasing demand, Rats expects state-owned oil companies and private firms will have to ramp up production, and oil prices will need to rise to fund that expansion. Currently, public companies account for about half of oil supply. Prices might even have to rise to $80 a barrel to induce private companies and state-owned ones to cover the gap. Rats increased his long-term Brent price target to $60 from $50.

McDermott thinks that different stocks will outperform depending on oil prices. At $60 West Texas crude prices,

APA,

formerly Apache (APA),

Diamondback Energy

(FANG),

Ovintiv

(OVV),

ConocoPhillips

(COP), and

Devon Energy

(DVN) look attractive, he says.

At $70, those stocks still look good, as do companies with more financial or operating leverage like

Murphy Oil

(MUR),

Occidental Petroleum

(OXY), and

Continental Resources

(CLR).

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