In the past several years, investors in the oil industry have experienced a significant amount of volatility.
As such, oil has been an increasingly difficult commodity to trade, and many may be questioning whether investments in the sector will continue to benefit their portfolio.
Indeed, just this year alone, the oil industry has been forced to contend with a situation in Ukraine, which has impacted supply, and the threat of a global recession, which could impact demand.
As a result, prices have been incredibly difficult to predict, jumping above $100 (£87.5) every few weeks, before dipping again. For investors, this makes trading oil in the short to medium term a difficult task.
However, according to reports, chronic underinvestment in the hydrocarbons sector amid green transition efforts and fluctuating government regulations could cause demand to outstrip supply.
Thus, in the long term, perhaps we can expect the industry to stabilise and prices to increase. In fact, USOIL is still in the top-10 traded assets at broker HYCM.
As always, there are still opportunities to be had for investors in the oil industry, but they must be aware of the factors that will determine its performance in the next few months.
The short to medium term
The price of oil is determined by future economic activity, supply and demand. As such, with recessions looming across the globe, we should expect oil prices to remain low in the short to medium term.
One of the most significant drivers of the price of oil this year has been the war in Ukraine.
Since its onset, prices have not only increased substantially but have been incredibly temperamental. For example, at the start of the year, oil traded at $52.2/bbl. Following the start of the conflict in February, prices spiked to $110/bbl, before skyrocketing again to $139.13 on March 7 when the Biden administration chose to ban Russian oil imports – the highest level since 2008.
At the time of writing, prices have dipped significantly again to $91/bbl. As the world’s third-largest exporter of oil, sanctions on Russian oil exports have decreased the amount of oil in the market, increasing its price.
However, diminishing demand has also played a major role in the volatility of the market. For instance, when the largest importer of oil globally, China, enforced fresh lockdowns in response to a Covid-19 outbreak in mid-March, prices once again dipped below the $100/bbl mark.
Similarly, fresh public health restrictions were brought in at the start of September, causing prices to tumble by 3 per cent. With some of the country’s largest export terminals in lockdown, the Chinese economy is experiencing a significant downturn that is weighing on the demand for oil.
In terms of future global economic activity, the short to medium term does not look bright. With the UK and Europe expected to enter a recession in the next few months, and the USA to experience a mild slowdown in 2023, we can expect consumers to spend less money on the products and services that maintain demand for oil, such as air travel or petrol. The market will likely focus on these bearish signals and prices should start to dip as demand falls.
Long term prospects for oil
However, in the long term, investors can feel a little more optimistic about the price of oil. As a result of government policies and the transition to more renewable forms of energy, investment in the oil industry has been somewhat ‘out of fashion’ for a while.
Thus, the industry faces some structural challenges that should cause prices to increase again in the future.
At a time when the world is facing an energy crisis and needs to increase supply, underinvestment in the oil industry will begin to push prices higher and increase the chances of energy scarcity.
Even before the war in Ukraine, the energy markets were already tight, with demand rising as the world reopened after the pandemic.
As such, the issues the oil industry faced before recent pressures on the sector – such as low commercial and strategic inventories or dwindling spare production capacity – still remain and will continue to make their presence known.
Consequently, supply will begin to be outstripped by demand, and prices should pick up once again.
In addition, we could see prices rise as the world’s economies begin to recover in 2023. In fact, according to the International Energy Agency, demand for oil will increase by a further 2.1mn barrels a day to a record high 101.8 mb/d next year.
As such, despite the economic slowdown that will hamper the oil markets for the next two to five months, we should see prices tracking higher later in 2023 because demand will remain high in the long term.
Even though it is difficult to foresee exactly how the coming months may unfold, recent volatility in the oil markets will obviously concern investors.
Although it is difficult to trade the commodity in the current climate, investors must recognise that the long-term prospects for oil remain relatively positive as the global economy recovers and demand begins to outstrip supply.
Giles Coghlan is chief market analyst at HYCM
