IN ACTION. During the first eight months of this year, the S&P/TSX index fell by just over 7%. Meanwhile, eight out of ten sectors of the leading index of the Toronto Stock Exchange were in the red. The only two that resisted the downward trend are utilities (+5.45%) and energy (+48.75%).
Investors who were predisposed to bet on energy stocks at the start of the year could see this part of their portfolios increase, while stock and bond markets fell in line with interest rate hikes announced by major central banks.
A gap of 55 percentage points between the energy sector sub-index and the S&P/TSX index is far from trivial.
Betting on a sector that has received such a bad press, while environmental, social and governance (ESG) investing is popular, requires a certain amount of confidence. Anyone discussing their oil investments in front of more environmentally conscious people is likely to be looked down upon.
However, looking at the latest studies by the International Energy Agency (IEA), like it or not, the demand for oil is increasing. The latter just raised its forecast for an average increase in daily demand to 2.1 million barrels per day (MBPD) in 2022, for a total consumption of 99.7 MBPD. Meanwhile, global production reached 100.5 MBPJ in July. In 2023, again according to the IEA, this same demand is expected to climb another 2.1 MBPJ, which would take it above its pre-Covid peak to reach 101.8 MBPJ. Then production will have to keep up or crude oil prices could rise again.
OPEC+ countries agreed on September 5 to cut their production quotas by 100,000 barrels per day to support prices in the face of recession risks, reversing a similar increase announced in August. The cartel and its allied countries, including Russia, are thereby sending a signal to the rest of the world.
There could be further cuts, which would have an inflationary effect on all products and services that are closely or remotely dependent on oil.
Although the current situation is uncertain, the supply is still slightly higher than the demand. This situation allowed the price of a barrel of Western Texas Intermediate (WTI) to fall by about 30% between its recent peak in June and early September.
It should not be overlooked that forces other than OPEC and its allies are influencing supply and demand, which could have a noticeable effect on the yields of energy stocks that benefit from high prices.
US reserves are falling
Since the beginning of the year, the US administration has not hesitated to dip into its strategic reserves in an attempt to bring down the price of black gold. According to the US Energy Information Administration, the United States had reserves of nearly 594 million barrels of oil as of December 31. During the week ended September 2, these same reserves were at 442.5 million barrels, their lowest level since November 1984. In eight months, US strategic reserves have thus decreased by more than 25%. Sooner or later, the US administration will have to slow down the decline in its reserves and potentially even replenish them, which will stimulate demand. If the war in Ukraine drags on and next winter is harsh in regions that use fossil fuels for heating, it would worsen the situation.
Which brings us to the big question. Is it still possible to invest in energy and hope for a good return in the medium term when most economists predict a recession in 2023 or 2024?
In the short term, the answer is not obvious. The US Energy Information Administration forecasts an average price of US$98.71 per barrel for WTI this year and US$104.78 for Brent. In 2023, these forecasts increase to $89.13 for WTI and $95.13 for Brent. If all this comes to pass, oil company profits will sooner or later reflect these declines, which will compress market values in the medium term.
In late August, Reuters published its latest survey of oil prices through 2026, based on the opinions of 41 industry analysts. (see table)
According to the study, the most optimistic see an average price of $125 per barrel for Brent next year and $120 for WTI, while the most pessimistic are betting on respective prices of $74 and $71 for both oil industry benchmarks. The average price forecast in 2023 is $96.67 for Brent and $92.48 for WTI, which is close to current values.
Of course, other geopolitical tensions may arise and significantly alter the balance between supply and demand, but these data call for caution and remind us of the old adage that past performance does not guarantee the future.
You have just read the first En action column, which will alternate with my colleague Dominique Beauchamp’s column, La sentinelle de la Bourse. Would you like us to analyze a subject or topic? Write to me at: [email protected]