Oil prices are on the rise

Oct 16, 2021 | Elinesky Schuett Private Wealth Management


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Oil prices are on the rise. In our blog post this week, we discuss the factors driving this upcycle and the opportunities and challenges that lie ahead. We have also included the monthly economic update video from Eric Lascelles, RBC Global Asset Management’s Chief Economist, Delta down, economy fine, but new complications.

We’ve been sharing articles for business owners over the past few weeks, including an invitation last week to an Exclusive webinar series for business owners. This week, we’re talking about cybersecurity in the online article, Seven cyber safety tips to protect your business.

The At home with RBC series continues to share fantastic videos that you can watch from the comfort of your home. Did you lace up your running shoes after last week’s video, Running for fun and fitness? Now it’s time to lace up a different type of shoe… your golf shoes! This week we’re sharing a video from RBC Ambassador and PGA Tour Professional, Webb Simpson.

As always, we end our weekly blog post with a few good news stories from in and around our community.


Your economic update

Global equity markets continue to digest a number of issues that have put a bit of a break on the markets’ upward momentum, at least for now. The supply chain bottlenecks that are plaguing multiple industries are top of mind these days, as they are exacerbating inflationary pressures that were already creating unease amongst investors. The third quarter earnings season, which is now underway, may provide some clues as to how companies are navigating this environment. Below, we discuss the energy industry, and oil in particular, which is experiencing a resurgence driven by its own supply issues.

Supply and demand pressures
Not surprisingly, there has been a recovery in demand as the world’s economies have been reopening to varying degrees, and levels of mobility and activity are returning closer to normal. Meanwhile, some countries in the northern hemisphere are expected to switch from natural gas to oil to fuel their power needs as they enter the winter months. That’s largely because natural gas prices in some jurisdictions are even higher than oil on a per-barrel-equivalent basis. That could add another tailwind to oil demand.

Crude oil prices have more than doubled over the past year, rising from below $40 per barrel to more than $80. A stronger demand backdrop is partly responsible for some of the oil price gains, but the bigger driver has been supply. One could argue that oil is simply following the typical path of a commodity cycle: high prices encourage growth in exploration, development, and production. This eventually leads to oversupply, weaker prices, and cutbacks to capital expenditures. Years later, the underinvestment leads to a lack of supply that eventually drives prices higher yet again, and so on. This classic cycle may indeed be playing itself out yet again as there has been notable under-investment over the past decade.

Climate and sustainability
There are some attributes that make every cycle unique. Most noteworthy, this time around, has been the focus on climate and sustainability in the public and private sectors that has made access to capital harder to come by across the fossil fuel industry. It’s hard to imagine this changing much going forward, given political pressure and the long-term nature of the commitments that governments and organizations have been making. This hurdle, along with demands from various stakeholders, has forced many North American oil producers to focus on efficient capital allocation and the prioritization of shareholder-friendly initiatives over recent years, as opposed to their previous strategy of maximizing oil production. And while the U.S. industry was regarded over the past decade as being the world’s swing producer – able to turn its oil taps on and off relatively easily – there are reasons to believe it may be more disciplined going forward.

Cooperation between OPEC members and Russia
There has been a similar shift among the thirteen members of the OPEC cartel, including Saudi Arabia. The cartel has been cooperating with Russia, and appears to be prioritizing oil price stability and strength, and only marginal increases in supply. This approach has helped many cartel members improve their fiscal situations versus their prior strategy of simply maximizing global market share at any price. It’s hard to predict whether this level of restraint will persist for the foreseeable future as we have witnessed many unexpected twists and turns in the past with respect to OPEC and Russia, who collectively control more than half of the world’s oil production. And so, this is likely to remain a source of uncertainty that will need to be considered.

The impact on the markets
The prevailing oil prices will inevitably lure more supply into the market, as is typical in an upcycle, but the rate of supply growth may fall short of prior episodes given some of the constraints mentioned above. That suggests the supply and demand dynamics have the potential to remain supportive of more elevated prices than what we’ve been accustomed to over the past decade. And we believe the global economy should have the capacity to handle higher oil prices, up to a certain extent, given the elevated savings of consumers and further economic reopening that still lies ahead.

Naturally, the oil sector should benefit from a more robust oil price backdrop. Some of this is likely already reflected given how well the energy sector has performed year to date. Despite this, the sector is not very widely owned by global investors because of the weak prices and meager investment returns from the past decade. Moreover, some investors have incorporated an ESG framework– environmental, social, and governance – into their investment decision making process. This has led some to minimize, if not entirely eliminate, their allocations to the fossil fuel industry. We suspect some investors will return to the sector as they try to capitalize on the improving environment, and this could help support existing stock prices. But, other investors may remain steadfast in their approach to sustainability and resist the temptation to revisit the sector. In other words, there should be stronger demand for energy stocks relative to the past few years, but perhaps not to the extent we have seen in past cycles.

The evolution to a more sustainable future that involves more sources of renewable energy is very much underway, but it will take years to unfold. In the meantime, the world’s economy still depends on oil, and the lack of supply combined with recovering demand suggests an upcycle may already be underway. The oil industry should continue to see some better days ahead, even if the longer-term challenges posed by the global energy transition remain.

Delta down, economy fine, but new complications

This month, RBC Global Asset Management’s Chief Economist, Eric Lascelles, covers the latest virus trends and various economic and policy matters. Then a look at China; why regulators are cracking down on many sectors, and what it means for the country from an economic standpoint. Eric also discusses the Canadian federal election, increased supply chain angst, and what’s pushing natural gas prices higher.

Watch the update online: Delta down, economy fine, but new complications

Text over hyperlinked image: RBC Global Asset Management. Delta down, economy fine, but new complications

 

 

Seven cyber safety tips to protect your business

woman working on laptop in boutique and talking on cellphoneAs a business owner, you have a lot of things that need your focus on a daily basis. As the world continues to shift online, the frequency and severity of cyber threats is increasing—becoming a major danger to business owners. Consequently, it's becoming more important to understand potential online risks to your business and proactively plan the steps needed to contain them.

Read the full article online: Seven cyber safety tips to protect your business

 

At home with RBC

We are excited to share a specially curated series featuring experts from arts and culture, food and wine, lifestyle and sports, and more, entertaining you from the comfort of your own home. Watch this blog post each week for a new video from the At home with RBC series.

Tips from Team RBC

Webb Simpson, Team RBC Ambassador and PGA tour pro, shares techniques and tips to help you improve your golf game. Watch the video online: Tips from Team RBC

 

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Community Corner

Each week, we like to share a few good news stories from in and around the community. We hope that they brighten your day!

As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.