Market Musings 010326: Oil Breakout

Podcast this week: A wind of Change in Latin America (click on link to listen)

Argentina’s President Javier Milei has delivered a landslide electoral victory, cementing his radical free-market reforms—a transformation strongly backed by the US as part of its broader strategy to reassert influence in the Western Hemisphere. If successful, Argentina’s model could ripple across the continent, inspiring similar shifts in Chile, Peru, and even Brazil.

Chile’s decisive turn to the right and Peru’s centre-right frontrunner suggest a regional pivot toward business-friendly policies, while Brazil—though still led by Lula—faces growing pressure for change. A pro-market shift in these economies would be a game-changer for equity markets, amplifying gains beyond commodity exposure and easing real interest rates.

Meanwhile, Mexico stands out as the region’s brightest star, benefiting from falling inflation, rate cuts, and accelerating GDP growth. Its undervalued equities—trading at a discount to both the S&P 500 and Asian peers—offer a compelling play on US growth without AI volatility.

With political tailwinds, strong US ties, and attractive valuations, Latin America is emerging as a high-potential alternative to tech-heavy Asian markets.

Oil breaks out of its 2022-25 downtrend

The current crude oil price integrates something like a $7-10/barrel risk premium according to JP Morgan. Clearly, the current build-up of tensions over Iran has driven the Brent crude oil price up from the recent lows of around $60/barrel, but it is still relatively low in the context of the last 4 years. 

Oil price up from recent lows, but a long way from 2022 highs

Even before the latest US-Iran tensions, global oil companies have been on a strong uptrend, benefiting from the rotation away from Technology growth companies and back to asset-heavy companies. They have taken time to digest the enormous rally post-COVID when oil demand returned upon reopening of the global economy post lockdowns, and secondly up on the huge rally in crude oil prices to well over $100/barrel in the wake of Russia's 2022 invasion of Ukraine. 

But as of February, this 2023-25 sideways trend is decisively over, with the US Oil & Gas sector breaking out to a new high in February.  Remember that integrated Oil & Gas majors like ExxonMobil, Shell and TotalEnergies don't just make money from upstream operations - getting oil out of the ground - but also from Refining & Marketing activities, which can benefit as long as economic growth is solid even when oil prices are low. 

US Oil & Gas sector hits a new all-time high in February

This is not just true for US companies, but also for Canadian and European Oil & Gas majors. 

Canadian Oil & Gas stocks show a similar uptrend in February

European Oil & Gas sector finally returns to the 2007 high

In terms of leading companies, both Shell and Repsol lead European oil majors higher:

Shell at a new all-time high

Repsol: strong momentum but far to go to reclaim prior highs

Even more interesting value propositions can be found in the Emerging Markets with companies such as the Brazilian Petrobras (also listed here in the US):

Petrobras (in $) recovers in line with Latin American stocks

For my part, I am concentrating on the Oil Equipment & Services sector, as I see interesting potential recovery in this sector after a long period of underinvestment in Oil & Gas production, particularly offshore. 

US Oil Equipment & Services ETF is strong

Companies I am looking at in this subsector include: Subsea 7 (Norwegian), SBM Offshore (Dutch), Vallourec (French, for pipes) and Tidewater (US).

Subsea 7 (Norway)

SBM Offshore (Netherlands)

Vallourec (France)

Tidewater (US), post takeover of fellow offshore oil platform service company Valaris by Transocean

Happy hunting, Monday morning should be interesting...

Edmund