Originally published by BetaShares
With solid global demand and ongoing supply side disruptions, oil prices could well remain reasonably firm over the coming year. If so, there may be investment opportunities in energy related ETFs. In this post, I examine the dynamics of oil and investment opportunities further.
Oil Market Appears Tight
Since bottoming in early 2016, global oil prices have been trending higher thanks to continued solid demand and a tightening in global supplies due to both OPEC production cuts and emerging capacity constraints in the US shale oil sector. Supply disruption in Venezuela and Angola together with looming new sanctions on Iranian oil exports have only added to the upside pressure of late.
In the 12-months to end-July alone, the WTI price lifted by 37%, from $US50.20 to $US 68.71 a barrel.
West-Texas Crude Oil Price $US/barrel
Source: Reuters. Past performance is not an indicator of future performance.
Responding to higher oil prices, OPEC recently agreed to lift production somewhat, even though Saudi Arabia appears to be the only member country with much spare capacity to offer a thirsty market. And – despite pressure from China and the US – the Saudi’s appear keen to keep prices at least around current levels, especially given the still planned float of its State oil company, Aramco.
Adding to the pressure in the oil market is America’s newfound desire to severely curtail Iranian oil exports through sanctions, which, if successful, could reduce global supply by a hefty 1 to 2 million barrels per day in coming months. As evident in the chart below, these pressures are coming at a time when the US Energy Information Administration (EIA) is already projecting a reasonably tight market heading into 2019, with OPEC spare production capacity back to the lows of the mid-2000s when oil prices last started to spike higher.
Investment Opportunities in the Energy Sector
If oil prices stay high, and especially if they move a lot higher, further investment opportunities may well emerge in the energy sector.