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Prominent oil and gas industry experts predict a bull market in 2023 and beyond, making it a favorable time to consider diversifying investment portfolios by investing in energy real estate. Despite a temporary dip in demand during the COVID pandemic, the industry has recovered, with continued demand also rising for home heating oil and gas. Consider taking advantage of the potential growth in the industry in 2023.
Energy experts predict a sustained bull market in oil and gas due to a persistent supply-demand imbalance. If you're new to energy markets, it’s important to understand the fundamentals of supply and demand in these industries.
The world's oil and gas supply is primarily influenced by three factors:
1. U.S. Shale - While U.S. shale production has increased by 11.6 million barrels per day, it falls short of meeting growing demand, which requires production of around 13 million barrels per day. The traditional shale model relied on access to debt and equity markets, allowing companies to spend more than their cash flow each year. However, debt markets are now more stringent and focused on ESG investments and net-zero goals.
Furthermore, production is restricted by equity investors who prefer stable production and maximizing free cash flow instead of growth. Additionally, the best shale acreage has already been extensively developed, forcing several companies to shift to lower-yielding Tier 2 and Tier 3 assets, limiting future shale production. Owners of productive Tier 1 assets will likely hold off on further drilling as the shortage of supply drives up the value of their assets.
2. OPEC - OPEC nations have faced low oil prices for the past six to seven years, sometimes below the fiscal break-even point, causing financial strain and requiring divestment and increased borrowing. However, they have not been allowed to invest in new productive capacity. Some countries are now underproducing their quota, losing billions of dollars. Despite having a spare capacity of around 2-3 million barrels per day, they are bringing in less than that capacity, leading to a continued shortage in global supply.
3. Global Super Majors - The Global Super Majors are large oil and gas companies mostly based in Europe, such as Shell and BP, among others. They have not invested enough in production since the 2014 oil price crash and now face pressure from shareholders to increase dividends, conduct share buybacks, and reach net-zero by 2050. Thus, they are shifting their investments from oil production to renewables like offshore wind.
The discourse surrounding the peak demand for oil is a topic of great significance. The lack of knowledge on the utilization of oil, alternatives to it, and a feasible timeline for transitioning to such alternatives has been deemed as "energy ignorance" by industry experts.
It's common to presume that gasoline consumption for transportation is the primary factor driving demand for oil. However, as the shift towards hybrid and electric vehicles gathers pace, one could reasonably anticipate a decline in the demand for oil.
The use of oil is much more varied than one might expect. While approximately 60% of oil is used for transportation, only about 27% of that is for cars, with the rest being used for other forms of transportation such as heavy hauling trucks and planes.
Despite the growth in the number of electric vehicles (EVs) globally, it will likely take at least two decades to reach the point where EVs significantly impact oil demand for cars. Similarly, alternatives such as hydrogen fuel for trucks and renewable jet fuel are not expected to become widespread for several more years.
The remaining 40% of oil demand comes from various industries such as petrochemicals, lubricants, plastics, cement, and agriculture. This demand is driven primarily by global population growth, which is expected to increase by 32% by 2050. This could keep demand for oil at all-time highs.
With the end of the era of oil and gas hypergrowth approaching, the world is on the brink of an oil supply crisis. To limit demand, some projections suggest oil prices will need to reach at least $150 per barrel, a number that experts believe is several years into the future.
The relationship between inflation and investment in natural resources is often considered complex by experts. If the current inflation resembles past experiences like the 1970s (when oil prices rose 361%) or the 1999-2008 bull market (when oil stocks increased 341%), it could be favorable for oil and gas investors.
Historically, natural resources have outperformed when commodity prices declined compared to the broader market. Data supports this - during inflationary periods, a weakened US dollar tends to lead to higher oil prices and favor oil investments.
Geopolitical turmoil raises oil and gas prices, as seen in March 2022 with the Russian invasion of Ukraine. The DJIA plummeted and oil prices rose over $115 per barrel, surpassing analysts' expectations. The energy crisis is expected to worsen, with natural gas prices in Europe doubling in a week this past winter.
Investing in oil and gas has had a negative image, as big investors seek diversification and the Super Majors face pressure to invest in alternative energy. Despite this, oil and gas still has high potential demand and an imbalance in supply and demand may benefit investors through dividends and share buy-back programs. When invested wisely, oil and gas may be a valuable addition to a portfolio, offering low historical correlation with traditional stocks, bonds and equities and potential for high returns.
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