Page 23 - ISQ Outlook 2023
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INVESTMENT STRATEGY QUARTERLY





























        Amid War And Inflation, Energy Security


        And Diversification Are In The Spotlight


        Pavel Molchanov, Managing Director, Energy Analyst, Equity Research






        In a year of epic turbulence in geopolitics and economics,
        2022 marked the fourth time in the past 13 years that inves-  We forecast that West Texas Intermediate (WTI)
        tors enjoyed outperformance from oil and gas stocks. For   crude will average $100/Bbl in 2023, ending the
        the second straight year, energy was the best-performing   year at $110/Bbl. Brent crude, the global bench-
        sector of the S&P 500, up more than 40%. While some    mark, should remain a few dollars above WTI.
        champagne may well be in order, let’s keep in mind that
        the oil and gas industry’s cash flow nearly doubled in 2022,
        so in that sense the stocks didn’t do quite as well as some   bounced around the $100/Bbl level for the first time since 2014,
        might have expected. The lesson here is that the market is   with Russia’s war in Ukraine being a major factor for tightening
        always forward-looking: with the oil futures curve pointing   the market. As the war is about to enter its second year, a potent
                                                            combination of U.S./European government-enforced sanctions
        to lower prices in the years ahead, the stocks are pricing in   and energy company divestments are creating pressure on Rus-
        less stellar, though still solid, profitability in the future. In   sian oil exports. Another geopolitical variable that needs to be
        an even broader sense, Energy remains less than 5% of S&P   watched is the long-running nuclear talks with Iran. Meanwhile,
        500 market cap—down from as much as 13% a decade    to state the obvious, global macroeconomic volatility is always a
        ago—illustrating that this remains an under-owned, some-  fact of life: the only question is what form it takes in any given
                                                            year. As central banks around the world continue to fight infla-
        what contrarian sector for investors.
                                                            tion, there is no avoiding demand-side risks, even without
        As we think about what 2023 has in store for the oil market, the   assuming outright recession. China’s zero-COVID policy is also a
        past year provided ample reminders that events can come sud-  question mark vis-à-vis demand. All that being said, we forecast
        denly from the proverbial left field. During much of 2022, oil prices   that West Texas Intermediate (WTI) crude will average $100/Bbl in
                                                            2023, ending the year at $110/Bbl. Brent crude, the global bench-
                                                            mark, should remain a few dollars above WTI.




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