Notwithstanding the trend towards sustainability, investing in oil may appear attractive to some considering how murky the global markets look at this time.
A global economic slowdown looms, but many analysts believe oil consumption levels will remain high, or at least in the same level as 2022, resulting in higher oil prices.
While the expected downturn could adversely affect demand, the lifting of Covid-related restrictions and return to pre-pandemic way of life could keep oil consumption elevated. Over the weekend a Reuters poll of 30 economists and analysts forecast that Brent crude would average US$89.37 a barrel in 2023, about 4.6% lower than the US$93.65 consensus in a November survey. The global benchmark has averaged US$99 per barrel in 2022.
Capital gains
Despite the difference there may still be opportunities for investors at these price levels. Traditionally oil and gas stocks can produce significant capital gains from share price appreciation and attractive dividend income during periods of high oil and gas prices.
While a growing number of people are talking about switching to electric cars and renewable energy, most of the world is still using oil for transport, industry, and energy. This will continue to be the case in 2023 and the foreseeable future.
Last year increasing oil prices following Russia’s invasion of Ukraine caused inflation to rise across the world. That inflation then triggered interest rate rises, which resulted in debt becoming more expensive. In 2022, global debt levels increased by 25% when compared to the 2008-09 global financial crisis, arguably as a result of rising oil prices.
As the cost of debt rises, the pressure increases for individuals, companies, and countries, which can push the global economy into recession in the first quarter or second quarter of 2023. But for investors, if the expected increase in oil prices is sustained, it can mean short-term gains subject to inflation, or at least going into Q1 and Q2.
What remains to be seen is whether demand for oil can be sustained if the global economy slips into recession during the period.
Demand drivers
With Covid restrictions being lifted in China, demand for oil from that vast market should increase. However, infection cases are spreading, and recent reports indicate that industries are starting to feel the impact of workers getting sick, which could lead to a serious labour shortage and prove detrimental to the Chinese economy.
Europe is going through a transition as it moves away from gas and oil supplies previously sourced from Russia. In the short to medium term, this transition could cost a lot as the continent sets up regasification facilities to convert liquefied natural gas back into gas to feed into their networks and generate electricity.
This means Europe is expected to see higher levels of inflation in the next six months or so, and that is likely to drag the economy into recession in Q1 and Q2 2023. In any case, European demand for oil is expected drop more quickly sooner rather than later.
There is also a strong possibility that the US economy may slip into a recession in Q1 and Q2, which in turn will also reduce global demand for oil. Since the US remains the world’s biggest economy, a slowdown there is likely to impact other countries whose economies are linked to the US.
And since China, Europe, and the US are the major drivers of global economic growth, a slowdown in all these markets happening at the same time will substantially impact the demand for and price of oil.
