About the industry
The Industry's demand
Oil and natural gas are major industries in the energy market and play an influential role in the global economy as the world's primary fuel sources. The processes and systems involved in producing and distributing oil and gas are highly complex, capital-intensive, and require state-of-the-art technology. Historically, natural gas has been linked to oil, mainly because of the production process or upstream side of the business. For much of the history of the industry, natural gas was viewed as a nuisance and even today is flared in large quantities in some parts of the world, including the United States. Natural gas has taken on a more prominent role in the world's energy supply as a consequence of shale gas development in the United States, as mentioned above, and its lower greenhouse gas emissions when combusted when compared to oil and coal.
Oil is a global commodity. The U.S. Energy Information Administration (EIA) estimates the world's demand for oil at more than 98 million barrels per day in 2023, an all-time high. When the price of oil rises, it tends to lower the demand in developed, but demand from growing emerging market economies is expected to increase as these countries industrialize regardless of the price of oil.
Sources:
U.S. Energy Information Administration. "Short Term Energy Outlook: Global Liquid Fuels."
About Us
Energy as an inflation hedge
Energy is a clear beneficiary of higher inflation. Our research shows that the energy sector outperforms in periods of higher inflation – by an average of 8%. The analysis looked at the performance of the energy sector, since World War II, when inflation was running at over 6%.
Energy has also proved defensive to some degree, even if this isn’t how it is viewed by most investors. It has been the most resilient sector during the recent downturn. Today, we see it as an increasingly attractive sector – dividends and share buybacks are likely to drive share prices, thanks to strong cashflow and low debt. For example, Shell is expected to buy back 12% of its market cap in 2022, boosting dividends and earnings per share for the remaining shareholders.
A final consideration is that, in recent years, energy has been thought of as a ‘sin’ sector, which is a sector that is deemed unethical. These sectors often become unpopular, prompting investors to sell. And as share prices drop, this can leave valuations attractive. In the case of the energy sector, some of the big oil companies are now involved in significant renewable energy projects so there is the potential for the sector to regain its popularity. The important factor is how it is perceived by the market.
Source: https://www.evelyn.com/insights-and-events/insights/is-investing-in-oil-and-gas-stocks-a-good-idea/
Managing risks
Weakening economic growth has historically influenced energy demand. However, during this period of economic weakness there has been very little demand destruction. Instead, Western countries are trying to build up their energy supplies so we should expect demand to remain relatively strong.
A rapid increase in supply from an alternative source is a risk to the outlook. As an example, if OPEC (the Organisation of the Petroleum Exporting Countries) was to suddenly increase the supply of oil – although there is no sign of OPEC stepping up production to help bring more oil to the market. Anecdotally, it seems that OPEC is concerned about the negotiations between the West and Iran. It is possible the US might do a nuclear deal and allow Iran to supply them with oil again. Overall, we think a sudden influx of alternative supply is unlikely.
Source: https://www.evelyn.com/insights-and-events/insights/is-investing-in-oil-and-gas-stocks-a-good-idea/