Energy stocks in 2023
A stand-out bet in 2022, will energy stocks continue their run in 2023?
One of the dreary memories of 2022 will be that of Russia’s invasion of Ukraine, which triggered shock waves through gas, coal, electricity, and oil markets and sparked a global energy crisis. While the long-run fall-out may be to speed up the transition to cleaner, more sustainable forms of energy, in the short run, given the current lack of green infrastructure, it has left energy markets vulnerable and prices volatile.
As a result, it has juiced earnings at energy firms, making energy stocks one of the stand-out bets in 2022. And yet, for 2023, the outlook for the sector is mixed. Below, we examine three bull points of the energy sector’s outlook in 2023 and three bear points.
The 'Bullish' Outlook
Here, we look at three reasons why energy prices may be higher, boosting energy stocks.
Continued disruptions to the supply of oil
Russia’s weaponisation of its energy exports has changed the status quo for energy security in the West, driving it up the political agenda and prompting a reassessment of energy sources fraught with geopolitical risks. While this has encouraged gas diversification in Europe and refocused minds on renewables investment, the impact won’t be felt for another year or two at the very least. It makes further supply disruptions and continuing price shocks much more likely.
Lifting of China’s Covid restrictions may help global economic growth
As the removal of Covid restrictions in China completes early this year, the re-opening of the world’s second-largest economy will likely boost faltering global growth and prop up energy prices on account of China’s enormous appetite for energy.
Oil, gas, and coal underinvestment may elevate prices
The rise of climate activism and sustainable investing in recent years has turned investors away from non-renewable forms of energy, starving these sectors of capital. It has led to underinvestment in new projects and reduced supply, potentially keeping prices higher for years to come.
US may add more oil to the market
While US shale oil producers appear to be maintaining fairly restrained and disciplined production amid higher oil prices, there is a possibility this could change, leading to increased supply, weakening prices.
The 'Bearish' Outlook
Here, we look at three reasons why energy prices may be lower, negatively impacting energy stocks.
Demand for oil wanes due to looming recessions
Higher interest rates have cooled economies and will likely push many into recession. As economic activity reduces, so does demand for energy. Although OPEC+ nations – representing around 40%1 of global supply – have cut production in response to recessionary threats, it has been insufficient to stop a slide in prices so far. The impact will be a hit on earnings at oil and gas companies, alongside higher costs in countries where windfall taxes have been introduced.
Oil supply disruptions become extreme
2023 could see geopolitical fault lines fracture further, particularly between energy consumers in the West and hydrocarbon producers in Russia and the Middle East. This could send oil and gas prices into the stratosphere, adding to global recessionary threats and further cooling demand for oil, lowering prices.
US may add more oil to the market
While US shale oil producers appear to be maintaining fairly restrained and disciplined production amid higher oil prices, there is a possibility this could change, leading to increased supply, weakening prices.
Alliance Trust's View
Alliance Trust does not hold a house view on the energy sector as we are aware of the difficulties in correctly calling styles, sectors, or regions consistently over time. Instead, we believe that what’s best for our investors is to balance the portfolio’s risks across these areas and add value by letting our stock pickers select great companies. This can, and does, result in divergent investment views.
For example, Rajiv Jain at GQG believes that underinvestment in the oil and gas sector as well as strong demand for oil across major economies will continue to support prices and keep cashflow and earnings strong, making oil and gas energy stocks an attractive long-term play. Therefore, investments for the Alliance Trust Portfolio include Petrobras, Exxon, PetroChina, Eni, Enbridge, Shell, Reliance, Total, and Tupras.
Rob Rohn at SGA, on the other hand, does not invest in energy stocks for Alliance Trust, citing the unpredictable and unreliable nature of revenue streams. These different views reflect different investment philosophies and perspectives, which WTW is happy to embrace to avoid groupthink. While making the right call on a sector can be handsomely rewarded, getting it wrong can be very expensive.
Marcus De Silva, Freelance Investment Writer
1. https://www.weforum.org/agenda/2022/11/oil-opec-energy-price/
This information is for informational purposes only and should not be considered investment advice. Past performance is not a reliable indicator of future returns. The views expressed are the opinion of the Manager and are not intended as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell any securities. The views expressed were current as at December 2022 and are subject to change. Past performance is not indicative of future results. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. You should not assume that any investment is or will be profitable. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. TWIM is the appointed Alternative Investment Fund Manager of Alliance Trust plc. Alliance Trust plc is a listed UK investment trust and is not authorised and regulated by the Financial Conduct Authority.