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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