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IN ACTION. During the first eight months of the year, the S&P/TSX index fell a little more than 7%. Meanwhile, eight out of ten sectors of the Toronto Stock Exchange’s flagship index were in the red. The only two that resisted downward movement were utilities (+5.45%) and energy (+48.75%).

Investors who had the foresight to bet on energy stocks at the start of the year could see that part of their portfolios rise while equity and bond markets fell in line with interest rate hikes announced by major central banks.

The 55 percentage point difference between the energy sub-index and the S&P/TSX is far from trivial.

Betting on a sector that has received such a bad press while environmental, social and governance (ESG) investing is popular takes a certain amount of confidence. Anyone who discusses their oil investments in front of greener people is likely to be frowned upon.

Growing demand

But looking at the latest International Energy Agency (IEA) studies, whether we like it or not, demand for oil is growing. It just raised its forecast for average daily demand growth to 2.1 million barrels per day (MBPD) for 2022, for a total consumption of 99.7 MBPD. Meanwhile, global production reached 100.5 MBPJ in July. In 2023, again according to the IEA, the same demand is expected to increase by another 2.1 MBPJ, taking it above its pre-Covid peak to reach 101.8 MBPJ. At that time, production will have to keep pace or oil prices could start to rise again.

On September 5, OPEC+ members agreed to cut their production quotas by 100,000 barrels per day to support prices in the face of recession risks, reversing a similar increase announced in August. The cartel and its associated countries, including Russia, thus send a signal to the rest of the world.

Further cuts could occur, which would have an inflationary effect on all products and services that are closely or remotely dependent on oil.

Although the current situation is uncertain, supply remains slightly higher than demand. This situation allowed the price of a barrel of Western Texas Intermediate (WTI) to fall by about 30% between its recent peak in June and early September.

It should not be overlooked that other forces besides OPEC and its allies are affecting supply and demand, which could have a noticeable impact on the yields of energy stocks that benefit from high prices.

US reserves are falling

Since the beginning of the year, the US administration has not hesitated to dip into its strategic reserves in an effort to reduce the price of black gold. According to data from the US Energy Information Administration, the United States had nearly 594 million barrels of oil in stock as of December 31. During the week ended September 2, these same inventories were at 442.5 million barrels, the lowest level since November 1984. In eight months, the US strategic stockpile has thus shrunk by more than 25%. Sooner or later, the US administration will have to slow down the decline in its stockpiles and eventually replenish them, which will stimulate demand. If the war in Ukraine drags on and next winter is harsh in regions that use fossil fuels for heating, it would make the situation even worse.

Which brings us to the big question. Is it still possible to invest in energy and hope for good returns in the medium term when most economists predict a recession in 2023 or 2024?

In the short term, the answer is not clear. The US Energy Information Administration forecasts an average price of $98.71 per barrel for WTI and $104.78 for Brent this year. In 2023, these forecasts increase to $89.13 for WTI and $95.13 for Brent. If all this materializes, oil company profits will sooner or later mirror these declines, which will depress stock market valuations in the medium term.

In late August, Reuters released its latest 2026 oil price survey based on the views of 41 industry analysts. (See table)

According to the study, the most optimistic see an average price of $125 per barrel for Brent next year and $120 for WTI, while the most pessimistic are betting on respective prices of $74 and $71 for both oil industry benchmarks. The average price forecast in 2023 is $96.67 for Brent and $92.48 for WTI, which is close to current values.

Of course, there may be other geopolitical tensions that could significantly change the balance between supply and demand, but this data calls for caution and reminds us of the old adage that past performance does not guarantee the future.

You have just read the first action column of En, which will be published alternately with my colleague Dominiqua Beauchamp’s column La sentinelle de la Bourse. Want us to analyze a topic or topic? Write to me at: [email protected]

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