The past few years have been volatile for commodities, as macro risk and geopolitical uncertainty alternated, along with pandemic shortages and inflationary pressures.
In the coming year, fears of an impending recession will outweigh supply concerns. Thus, Viktor Hjort, head of BNP Paribas’ global credit and equity & derivatives strategy, described energy equities as the top sector in Europe, because “they are supported by oil prices, and offer Two free and easy cost estimates – the product that comes from money. “
With the energy transition and the coming winter thrown into the mix, a “new sector” is emerging in the energy market, said Andrew Harmstone, senior portfolio manager, global multi-asset land, and head of the global balanced risk management team at Morgan Stanley Investment. Administration.
“Another topic – which is related to the topic of inflation and the equity market – is the new environment of the energy market. The major changes in the energy market towards of low carbon fuels means that we will not see much research and development of fossil energy energy. The war in Ukraine and withdrawal from Russian energy sources also means that some of the sources the supply is not as reliable as one would like,” Harmstone said.
“All of this reduces supply in the short term, so energy prices could be higher during this transition,” he added. “The impact of the investment is that we should keep the equity warning that we are looking for the right opportunity.”
With the outbreak of the Russia-Ukraine war in February and the reduction in production by the Organization of the Petroleum Exporting Countries and allies (OPEC+), the energy sector is the best economic sector. worldwide in the first 10 months of 2022, with a return of 33%, noted the UBS Chief Investment Office in the 2023 outlook.
Separately, slow global growth is bad for the energy sector, but UBS believes that the oil market is strong enough to support higher prices even if demand declines. “The sector’s valuation is just 7.4x trailing 12-month earnings – a 50% discount to the 10-year average.”
The Swiss bank believes that energy reserves are low due to the possibility of higher oil prices. “We will see a rise in oil prices soon, due to the transition from gas to oil this winter, the OECD may end. [Organisation for Economic Co-operation and Development] release of strategic oil reserves and a future European ban on Russian crude oil imports.”
UBS forecasts WTI oil prices to reach US$107.0/bbl in March from US$85.8/bbl on Nov. 14. UBS also expects that Brent oil will reach US$110.0/bbl from the price of US$93.1 in the same period.
These high prices may come sooner than expected. In the BNP Paribas global forecast for 2023, trading strategist David B. Wilson maintains the Brent oil price forecast at the end of 2022 at US$100 /bbl.
However, Wilson has cut his Brent forecast for 2023 and 2024, as the market’s focus is moving away from a supply shortage to a recession and calls for destruction, though despite the “important” shift from gas to oil. “We expect the market to slow down in 2Q2023-3Q2023 based on weak demand, with Brent bound between US$92/bbl and US$100/bbl, supported by the price of the lowest OPEC $ 90 / bbl, but constrained by the weakness of demand in response. to higher prices. We expect that the balance of the market 2024 will be in line with 2023.”
However, Wilson cites “significant” uncertainty surrounding BNP Paribas’ core business, turned upside, due to higher Russian supply risks following the ban on oil and oil products and the possibility of surge in Chinese demand.
Due to the increase in US oil production, WTI is trading at a discount to Brent crude oil. Wilson said: “We expect the WTI discount to moderate but remain very high, due to commodity and quality reasons, at US$6–US$8/bbl for 2023 and then US$5 –US$7/bbl by 2024.”
Strengthening with oil
In addition to equity exposure, UBS recommends investing directly in oil. “Aside from equities, we think selling volatility in oil is an attractive strategy. Longer oil contracts still mitigate the potential for longer-term energy price increases, in our view, and taking “Active commodity shares can provide financing benefits for a broad investment portfolio.”
James “JB” Mackenzie, director of Charles Schwab Futures & Forex LLC, stops short of recommending a specific asset class, but notes increased interest in oil throughout the year.
“We don’t recommend any product or asset class, but in 2022, we saw the volatility in the oil market and individual retail investors used retail futures to to hide or create dangerous places,” Mackenzie told The Edge Singapore.
“As oil prices have fallen, retail consumer interest in these markets has waned. Because futures provide 24-hour access to the market, five days a week, we see that they can be an important tool in an investor’s portfolio to help them achieve their goals,” he said. added.
Micro contracts for oil futures and options allow investors to buy oil production at a fraction of the full price. Small contracts reflect actual oil prices; while avoiding fees, such as investing in exchange-traded funds (ETFs), and avoiding the problems that may arise in managing companies with public funds.
At one-tenth the size of the WTI Crude Oil contract, Micro WTI Crude Oil futures and options allow investors to trade in smaller volumes to manage oil prices with greater precision. .
Over the past two years, broad-based investing has delivered strong performance and delivered significant returns to your portfolio, says UBS. “In the long term, we think that sustained growth in demand for energy, food and transition metals, and a focus on energy sustainability and security, should continue to support prices.”
UBS highlights the “active approach” to investing in commodities, due to the level of cyclicality. “Portfolio participation in inflation can also be achieved indirectly, through investments in the financial sector, or through countries and high-yield currency.”
2022 is not a kind year, and investors need to remain vigilant in the year ahead, said Tan Min Lan, Head of APAC Investments, UBS Global Wealth Management. “But we think that capacity is also important to take advantage of the changes that are happening.”
Source: The Edge Singapore
