An exciting year ended with concerns about the possible recession and energy demand outlook for the year ahead. Both Oil and Gas were on a roller coaster ride in the first months of 2022, especially after increasing tensions because of the Russian attack on Ukraine. Both Gas and Oil tested multi-year highs in 2022, but with prices that they ended the year, respectively, printed more than 67% and 40% loss from the year high.
Both products and energy stocks could be a good investment for 2023
While the main reason for price decreases last year were China’s recent lockdowns, strong USD, and weaker economic data from the most developed economies, these reasons will be in different directions for the year ahead.
China’s lockdowns ended, and the government of China made a significant U-turn in its Zero-Covid policies; USD is not as strong as last year, and they can encourage the energy market. On the other hand, increasing recession fears and slower economic growth can decrease demand. However, we may have another essential determinant this year. Tensions in the Middle East are growing, especially with ongoing protests in Iran, which can increase the pressure on other countries and even cause limited military conflicts in the Persian Gulf. Therefore, besides other options, we must watch the geopolitical news.
Gas had a different scenario. The price of gas was directly affected by the war between Russia and Ukraine. Military conflicts ended with an energy war. While European were trying to push Russia to impose energy sanctions, Russia also used its superior position in the energy supply for mutual pressure on the European economy. These tensions raised the gas price, but step by step, Europeans found new energy resources or providers, which made them less dependent on Russian gas and cooled the prices.
Compared with three months ago, most banks and financial and research institutes decreased their price prediction for 2023, but still, most expect prices above $90, with a range of movement between 80 and 100 dollars. Goldman Sachs decreased price estimates to $98 per barrel, JP Morgan expects $90, EIA has a $92 forecast, and City group sees prices around $75.
To see how and why they expect mentioned prices, it would be better to review the Energy market drivers for the year ahead.
As the biggest oil importer, China always plays an essential role in the Oil market. Since china changed its Covid policies, ended its restrictive measures, and opened its borders, we can expect their return to everyday life, which can rapidly increase the demand level, especially from the second quarter.
Contrary to the hopes for a nuclear agreement between Iran and the West last year, in 2023, fears of even military conflicts can bring the energy market into a severe crisis. A nuclear deal with Iran is no longer the top priority for western powers, as domestic protests to change the regime get more attention. Still, if conditions change, the government in Iran can negotiate first with its domestic protesters. Then there will be an excellent chance to agree with western powers, and it can end with Iranian oil trading on the global market, which would push prices down.
Despite all the sanctions and restrictions created, there is no doubt that Russia is one of the most critical players in the global energy market. Most sanctions against Russian Oil, Gas, and Petrochemical industry will go into effect in February. In the short term, it will affect once again the energy and especially gasoline prices in Europe, but it would not be a long-term market changer. Russian petroleum products can be processed in another country and supplied to global markets. Therefore after a short wave, things will turn to their normal condition.
On top of all mentioned market players, inflation and global recession still occupy the minds of many investors. Less inflation, expected to be seen slowly, can end with less hawkish measures by central banks, especially by the Fed, which means cheaper USD and higher energy prices. However, if, because of inflation or any other reason global economy faces a recession, lower energy demand can seriously reduce costs, depending on the recession level.
Furthermore, finally, OPEC and its allies are called OPEC+. Although this group of manufacturers always plays a vital role in the market, if there is a need to increase production, only Saudi Arabia, Iraq, and the UAE can raise their output. Still, it is also limited. The lack of investment in new drilling and extraction during the pandemic has disrupted the supply chain.
On the other hand, there is a possibility of more production from some other countries, like Mexico, or even the return of Venezuela to the markets. However, we should remember that US SPR. The United States used record-breaking amounts of its strategic petroleum reserve to replace part of the market shortage, and now it must be replaced. Therefore, we can see more demand from the US as well.
In summary, given the global geopolitical and economic conditions, we still have enough and even an additional market demand source, while production is the issue. Therefore energy sector, in both products and energy stocks, could be a good investment for 2023.