Opportunities on the Horizon: Investing Through a Slowing Economy

Thematic updates | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 51 An unusual energy cycle is upon us. While the global price of oil has fallen 15% since April 12th 2023 1 , there is no sign a recession at western energy firms. In the US, crude oil output is moving toward record highs. To help replace Russian gas supplies to Europe, US liquified natural gas (LNG) exports surged 45% above their pre-COVID level ( FIGURE 1 ) . At the same time, OPEC reduced output by about 3% through cuts announced in October 2022 and April 2023. 1 Under normal circumstances, OPEC cuts production as demand falls ( FIGURE 2 ) . That’s not the case just yet. This time around, OPEC is attempting to maintain higher prices in the face of future demand reduction, maximizing the market price per barrel. This is not welcome news for those counting on lower energy prices, but it does suggest that energy credit and equity investors can view the sector somewhat differently from the typical boom and bust norms associated with prior economic downturns ( FIGURE 3 ) . We are not forecasting a “new supercycle” for the oil industry as suggested by other firms. Citi Research’s renowned commodities team has been more cautious than many in assessing risks to commodities prices. Increases to petroleum and gas supplies typically lag behind demand recovery. History shows that higher prices will, over time, cause supplies to increase, forcing a new equilibrium to be established. This time, the new supplies will include even faster adoption of alternative energy sources. 1 Reuters, OPEC+ announces surprise oil output cuts, April 2, 2023, https://www.reuters.com/business/energy/sarabia-other-opec-producers-announce-voluntary-oil-output-cuts-2023-04-02/ FIGURE 1 : LNG Prices Surge 0 100 200 300 400 0 100 200 300 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 Barrels (Millions) Billion Cubic Feet US Liquefied Natural Gas Exports (LHS) US Field Production of Crude Oil (RHS) Source: Haver Analytics as of May 3, 2023. Grey areas note US recessions. FIGURE 2 : OPEC Cut Production Before a Dip in Demand -30 -25 -20 -15 -10 -5 0 5 10 15 20 Y/Y% Change OPEC Crude Oil Production (B/D) World Oil Demand (B/D) '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 Source: Haver Analytics as of May 3, 2023. Grey areas note US recessions.