Search by author, topic or keyword
SpanishEnglishColumn+2 topics

Perspectives for the energy market

The invasion of Ukraine and the economic sanctions applied to Russia as a consequence have completely changed the reality of the energy industry. In the first days of March, the WTI oil barrel reached around 125 dollars per barrel, and then fell back below 100 dollars. Until a few weeks ago, reaching this last value was seen as a very negative scenario, but today it is seen with different eyes.
A first question that arises is why production in the United States, one of the main producers, has not increased. In the first place, this would take time. But, beyond that, the plan of many producers for this year was to increase their volumes by between 2% and 5%, leaving a significant part of their cash levels to return money to their shareholders, who had seen poor returns in previous years. These plans will not be easy to reverse.
To understand the above we have to go back to 2012 and 2013, when shale oil producers enjoyed a period of bonanza, as the WTI barrel was above $100. But already in 2014 the production of OPEC (Organization of Petroleum Exporting Countries) countries grew, ensuring a fall in prices and a reduction in the margins of many U.S. producers. Investors in these companies are the ones today demanding returns and are reluctant to expand production. In fact, since 2014 it was very common for the energy sector to earn returns below the S&P 500 index average.

Add to this the high price volatility we have seen in recent weeks, which is not good when it comes to planning long-term investments. Of course, a solution could come from new investors. However, many large investment funds have avoided the fossil fuel sector. It is not clear whether this has been a product of the relatively low returns of recent years or the result of pressures to invest in sustainable sectors (known as ESG).

In either case, the result has been a lower flow of capital for investment. However, this reality has begun to change. The first quarter of this year has been favorable for the energy sector and there are flows into the sector, especially for oil and gas producers. Even with a price of $90 per barrel, the industry is highly profitable in the United States. Large companies tend to make projections with much lower prices, around $50.

Another interesting aspect is what happens with liquefied natural gas. All indications are that the United States will sell more to Europe, although this will take time to materialize, as the terminals to receive the shipments take time to build. Countries such as Qatar and Australia can also help reduce Europe's dependence on Russian gas. Today, Russia has a tremendous advantage over these competitors, as it can export at much lower cost, since it does so through a pipeline. In addition, Russia can supply large quantities and very quickly, all of which gives it great market power. In the long run, Europe could pay much less by importing from other countries. This difficulty in switching gas suppliers quickly has led some countries, such as Italy, to step up production at their coal-fired plants. From an environmental point of view, it would obviously be better to be able to use gas.

In the short to medium term, we can expect the price of oil to remain volatile, moving between $80 and $120 per barrel, largely as a result of geopolitical considerations. For example, a peace agreement between Russia and Ukraine would drive prices down. Even so, we can expect prices to remain relatively high going forward, as Russia has fallen out of favor with the West. Indeed, we have already seen projections that Russian production will fall by three million barrels during the second quarter of this year, an amount that could not be replaced by OPEC, even if sanctions against Iran and Venezuela were lifted.

In the long term, with higher levels of investment to increase production capacity, countries such as Mexico, the United States, Canada and Australia could help the West to reduce its energy dependence, in oil and gas, on Russia and the Middle East. Until that happens, however, energy prices can be expected to remain high.

Originally published in spanish in:

This material is for informational purposes and is intended to be used for educational and illustrative purposes only. It is not designed to cover every aspect of the relevant markets and is not intended to be used as a general guide to investing or as a source of any specific investment recommendation. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. This material does not constitute investment advice, nor is it a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. In preparing this material we have relied upon data supplied to us by third parties. The information has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made by Altafid, PBC or its affiliates, as to its accuracy, completeness or correctness. Altafid, PBC or its affiliates do not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regard to the results obtained from its use. Altafid, PBC or its affiliates have no obligations to update any such information.

 Austin, USA
13215 Bee Cave Pkwy, Ste. A240,
Austin, TX 78738
 Santiago, Chile
Rosario Norte 555, oficina 1604,
Las Condes

Members of:

This property and any marketing on the property are provided by Altafid and their affiliates.
Investment advisory services are provided by Innealta Capital, LLC, an investment adviser registered with the SEC. Please be aware that registration with the SEC does not in any way constitute an endorsement by the SEC of an investment adviser’s skill or expertise. Further, registration does not imply or guarantee that a registered adviser has achieved a certain level of skill, competency, sophistication, expertise or training in providing advisory services to its advisory clients.
Brokerage services for our advisory clients can be provided by Charles Schwab & Co., Inc. , Apex Clearing Corporation and Pershing LLC, each a SEC-registered broker-dealer and member of FINRA/SIPC. These broker-dealers are not affiliated with Altafid or its affiliates.
Please consider your objectives before investing. A diversified portfolio does not ensure a profit or protect against a loss. Past performance does not guarantee future results. Investment outcomes, simulations, and projections are forward-looking statements and hypothetical in nature. Neither this website nor any of its contents shall constitute an offer, solicitation, or advice to buy or sell securities in any jurisdictions where Innealta Capital, LLC is not registered. Any information provided prior to opening an advisory account is on the basis that it will not constitute investment advice and that we are not a fiduciary to any person by reason of providing such information.
Any descriptions involving investment process, portfolio construction or characteristics, investment strategies, research methodology or analysis, statistical analysis, goals, risk management are preliminary, provided for illustration purposes only, and are not complete and will not apply in all situations. The content herein may be changed at any time in our discretion . Performance targets or objectives should not be relied upon as an indication of actual or projected future performance.
Investment products and investments in securities are: NOT FDIC INSURED • NOT A DEPOSIT OR OTHER OBLIGATION OF,OR GUARANTEED BY A BANK • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities including possible loss of the principal amount invested. Before investing, consider your investment objectives and our fees and expenses. Our internet-based advisory services are designed to assist clients in achieving discrete financial goals. They are not intended to provide tax advice, nor financial planning with respect to every aspect of a client’s financial situation, and do not incorporate specific investments that clients hold elsewhere. Prospective and current clients should consult their own tax and legal advisers and financial planners. For more details, see links above to CRS (Part 3 of Form ADV) for natural person clients; Part 2A and 2B of Form ADV for all clients regarding important disclosures.
The IN logo is a registered trademark of LinkedIn Corporation and its affiliates.
©2023 All rights reserved. 1095-INN-06/23/2022