This past year will likely go down as a turning point in the energy sector. After years of underperformance, energy stocks soared in 2022. While higher energy prices played a key role, an even more significant catalyst was energy security becoming a top priority for most countries following Russia's invasion of Ukraine. The fallout of that ongoing conflict will likely have a major impact on the sector this year.
No one knows exactly how 2023 will play out. However, I will try my luck by making a few bold predictions about what I believe we'll see in the oil patch in the coming year.
Oil prices top triple digits again
Last year, I boldly predicted that oil prices would remain high and could top $100 a barrel again. With supplies still tight coming out of the pandemic and demand recovering, the stage appeared set for a potential major spike in crude prices if there was a supply disruption. That's exactly what happened following Russia's invasion of Ukraine.
Another bull market is coming for oil in 2023. Supplies remain constrained because oil companies continue to be cautious about investing in expanding their output. In addition, there's a lot of uncertainty about Russia's supply. It recently banned oil exports to countries that implemented a price cap on its oil in response to its ongoing war with Ukraine. Finally, the U.S. has stopped drawing down its Strategic Petroleum Reserve (SPR).
Meanwhile, on the demand side, China appears poised to reopen its economy fully. There could be enormous pent-up demand from that country. While a global economic slowdown could affect demand, the continuing return to normal following the pandemic could keep consumption elevated.
All these signs point to higher oil prices in 2023, with many Wall Street analysts expecting crude to top $100 by midyear. I agree.
Carbon capture will become one of the hottest investment trends in 2023
While climate change remains a top concern for global governments, energy security has become an equally important priority. That's leading countries to seek out solutions to both problems. One that's emerging as a potential game changer is carbon capture and sequestration (CCS). The technology captures carbon dioxide and sequesters it underground. As a result, it reduces the emissions profile of fossil fuels.
Oil companies believe CCS represents a multitrillion-dollar commercial opportunity. Because of that, oil giants like Chevron (CVX 0.66%), Exxon (XOM 1.01%), and Occidental Petroleum (OXY 1.14%) are investing heavily in CCS technology and projects.
I believe 2023 will mark an inflection point for CCS. We'll see more countries and companies get on board with the idea that CCS can become a significant part of the solution to climate change. That should drive considerable investment in the sector. It should also buoy the stock prices of energy companies that are first movers in the space, like Occidental Petroleum, which has plans to develop 100 direct air capture facilities for CCS around the world in the coming years.
The next wave of LNG projects starts construction
Another fuel that can be a solution to the world's energy security and emissions problems is liquefied natural gas (LNG). Natural gas is abundant in certain parts of the world and has a lower emissions profile than oil and coal (it can even become net zero through CCS). Because of that, it could become the key to solving Europe's energy crisis now that Russia has reduced its gas supplies to the continent.
According to ExxonMobil, the fuel is in short supply. That's why we'll see several LNG export facilities reach positive final investment decisions in the coming year. There are many in the pipeline, including projects supported by Energy Transfer (ET 0.08%), Devon Energy (DVN 0.77%), and ConocoPhillips (COP 1.38%). Energy Transfer has been working on its Lake Charles LNG project for years. The midstream company should finally approve that project in 2023, which could significantly boost its valuation and long-term growth outlook.
The oil industry's future will become clearer in 2023
Russia's invasion of Ukraine has dramatically altered the oil market's long-term outlook. Along with other catalysts, that war will likely keep oil prices elevated in 2023. As a result, energy security will remain a priority, driving a new wave of LNG investments. CCS will also emerge as a viable long-term solution to extend the life of the fossil fuels sector. Given this outlook, I expect oil stocks to do well again in 2023, especially those with CCS and LNG projects in the pipeline.
Matthew DiLallo has positions in ConocoPhillips and Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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January 02, 2023 at 11:51PM
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3 Bold Oil Market Predictions for 2023 - The Motley Fool
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