06 January 2020
Energy is a new theme for 2020. It was the worst-performing sector last year, almost 20% behind the market average in most major markets, and did not act as a hedge to geopolitical tensions, which it has done at times in the past (when there have been concerns over security of oil supply). The price of crude oil fared relatively better, up 27% in 2019, placing it amongst the best-performing commodities.
Several factors turned in the sector’s favour late in 2019, however, which may act as tailwinds in the coming months. These factors included the productive outcome of the 7th OPEC+ meeting, the relative success of the Saudi Aramco IPO and improved forecasts for the global economic outlook. Institutional investors took notice and started to buy from underweight positions.
The recent US air strike on Iran raises fears around oil supply from the most important crude-producing region. This development follows the agreement from OPEC+ to reduce its output target by a further 500,000 barrels per day and, together with a slower rate of growth from US shale production, we are now more positive on the supply side of the oil price equation (although longer-term OPEC+ compliance must come with a word of warning given past violations).
On the demand side, we are heartened by better economic forecasts and possible resolution to the US-China trade war, which should revive international trade, demand from transport and industry and use of the raw material for chemical products. China, which is an important determinant for global oil and gas demand, should continue to drive electrification.
In order to benefit from higher oil prices, the large E&P companies need to remain disciplined in their capacity response. Increasing shareholder value is reliant on the oil companies continuing to reduce capital expenditure. A better outlook is reflected in strong earnings growth for 2020 but not yet in Energy sector valuations.
To read more about our 2020 equity themes, please read our recent note.