Market Insight: Oil & Gas Analysis
The oil price has been volatile but in the long-term, prices will be driven by a lack of supply due to changes in the global energy mix while the world leans toward clean renewables and away from fossil fuels. This is why despite fears of slowing global growth the oil and gas prices remain historically high.
Volatility but the Trend is still Positive
As you can see from the chart above, the oil price is very sensitive. In early June it jumped to a 13-week high of US$122/barrel due to strong demand from the US and China amidst supply concerns. This enthusiasm was tempered by the release of US May consumer prices on 10 June indicating inflation had reached a 40 year high with the CPI rising 8.6%. China was also imposing lockdowns again.
As a result of the increasing inflation, on 15 June the US Federal Reserve raised its benchmark interest rates by 0.75%, its most aggressive hike since 1994, prompting concerns of a potential global recession as consumer confidence slumped.
In early July, oil started to trade below US$100. By mid-July 2022, ongoing China lockdowns were dimming prospects for an oil demand recovery. It was also becoming evident that a lot of Russian oil was being delivered to China, India and South America, displacing oil from other jurisdictions.
Equities a Leading Indicator
At its worst, oil may have made a low of US$90/barrel on 15 July, a day that recession fears were high. The oil price then bounced off the 200-day moving average to above US$100/barrel. On 19 July, oil closed at around US$103. As we write, oil is close to US$100/barrel.
The equities market has been a good leading indicator of oil price action. US oil and gas equities have been in a strong uptrend since August 2021 through to June 2022. The stocks have generally been in freefall since then, with many retracing to the 200-day moving average. The oil price did the same.
US$150 Possible, but Volatility is Certain
The oil price has just had a strong bounce, although it has retraced to US$100.
Meanwhile, the US oil and gas equities sector has experienced a strong bounce across the board. Is this a sign the worst is over for oil prices, at least for the near term?
Given oil price volatility and the many levers affecting it, we still believe oil is capable of reaching US$150 again.
Restrictions on funding and the trend to renewables reduces future investment in oil and gas. It may be that recent high prices have encouraged investment, particularly from smaller oil groups. However, the sharp fall in prices is an indication that constant high prices cannot be relied upon. This can be expected to curb investment.
What's coming Up?
Europe’s heavy reliance on gas has expanded the market and prices for liquefied natural gas, hence this week we focus on a gas developer with a big future. Next week we continue our focus on the sector, focusing on gas and drilling down on another company concentrating on the East Coast gas market. We also cover our favourite small oils company.