Where did nosebleed oil prices go? One year after Russia invaded Ukraine, doomsday forecasts of war-driven shortages driving ever-higher oil and gas prices have fallen flat. In Canada and globally, energy prices stalled or are dropping. Storage tanks are mostly full as production booms. It is all good for consumers – but not for energy stocks in 2023. Here is a look at why.
Last February, gas prices skyrocketed, and oil soared past US$130 a barrel on worries of Russian supply cuts. Forecasts of US$200 oil were common. Some fretted about near-US$400 scenarios if Russia slashed production in retaliation against Western sanctions and bans. Canadian headlines warned of 1970s-style shortages akin to those Pierre Trudeau faced in office, while winter blackouts froze Europe. But time and market forces proved those theories wrong.
The war premium vanished. Now oil is 33 per cent off March, 2022′s peak in Canadian dollars and 36 per cent from March’s U.S.-dollar peak. Since August’s spike, Europe’s gas prices have plunged 84 per cent. Meanwhile, European gas stockpiles hover nicely above historical averages, undercutting shortage fears. Global liquid-fuels production rose 4.4 per cent in 2022, courtesy of OPEC, the United States, Canada and … Russia.
Yes, despite all the fears, Russian production rose in 2022. New Russian oil well counts rose nearly 7 per cent versus 2021. How? After Western boycotts hit, supply chains reshuffled – fast. Russian crude destined for Europe was redirected to India and China, which both scooped it up at big discounts. Discounts meant Russia had to produce more to sustain itself. That isn’t great for sanctions’ geopolitical effectiveness. But it kept supply abundant, erasing initial price spikes.
High prices are signals in free markets. They worked perfectly in 2022, spurring more production, facility building and supply reshuffling in Canada and everywhere. Alberta’s conventional oil and oil sands output notched new annualized record highs. Overall Canadian oil and gas rig counts are up 14 per cent year-over-year, too – right behind America’s 20-per-cent increase. Meanwhile, U.S. private shale drilling is booming. Global energy firms are raking in profits, as are hotels, restaurants and other ancillary businesses serving their employees. Free market magic!
But just as prices are signals to producers, booming production now sends warnings to investors: Energy stocks won’t be in favour. They are more price-sensitive than volume-sensitive. So, energy prices matter more than production levels. Forward-looking markets know booming production inflates supply, potentially suppressing future prices.
Consider 2009–2020′s global bull market: U.S. and world output surged amid America’s “shale revolution,” which spread to Alberta’s Duvernay and Montney formations. Yet world energy stocks rose just 64.7 per cent in that period versus global stocks’ 350.6-per-cent gain. Energy lagged in eight of nearly 11 full calendar years.
Energy should lag now, with Canadian energy firms additionally hampered by government initiatives. Prime Minister Justin Trudeau’s proposed oil-and-gas emissions caps and “Just Transition” bill incite endless political bickering on all sides, fanning uncertainty. That, plus soaring global production, should impair Canadian energy stocks markedly.
Energy bulls claim China’s reopening will turbocharge demand – while price caps and oil product bans squeeze Russian production. Perhaps. Canadian LNG exporters’ planned expansion into Asian markets could provide a short-term boost to Canada’s domestic energy firms, but the lack of export infrastructure is a headwind. And the U.S. Energy Information Administration forecasts world liquid fuels production increasing 1.1 million barrels per day in 2023 – even after potential Russian cutbacks.
Moreover, 2022 Russian supply fears proved overblown. The European Union found alternate diesel suppliers ahead of last February’s Russian oil products ban, partly explaining the fall in European diesel prices afterward. Russia also has other new buyers such as Pakistan for its more easily exportable crude. Hence, despite Russian oil product exports’ mid-February slump, seaborne Russian crude shipments to China, India and Turkey are near their highest levels since the beginning of 2022. Absent global commitment, boycotts and sanctions never restrict, they simply redirect exports to different customers.
With all this global rejigging afoot, 2023 supply will prove greater than feared, hampering oil prices and muting energy stocks’ rise. Furthermore, energy’s strong 2022 performance increases the risk it underperforms this year. Leaders usually become laggards when bear markets end. That’s already started. Since global stocks hit mid-October’s low in U.S. dollar terms, energy is the worst-performing industrial sector. In 2023 through mid-February, global and Canadian energy stocks are trailing broader markets by around four percentage points apiece. Own some for diversification. But only some and only for that. How much? Even after 2022′s outperformance, energy comprise 5 per cent of world markets. Owning much more than that increases risk.
In 2022, the energy sector’s global response to spiking prices was a free market masterclass. Cheer it – but don’t expect energy stocks to lead again in 2023.
Ken Fisher is founder, executive chairman and co-chief investment officer of Fisher Investments.
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