Currently, I’d say the oil industry outlook is murky at best. In general, the black stuff is closely tied to the economic performance of its largest consumers – the U.S. and China. That’s because when the economy is good, people are building new things, traveling, and spending on new goods. All of those things require energy, and oil is the key power source for the global economy. On the flip side, a slowdown means oil supplies outweigh demand, and that can bring commodity prices crashing down.
Geopolitics also influence oil prices, particularly because some drilling sites are located in controversial or unstable areas. Geopolitics can also give rise to sanctions, as in the case of Russia following its invasion of Ukraine. Sanctions tend to result in thinning global supply. The conflict in Ukraine sent oil prices soaring, and will probably continue to keep a floor under prices as long as uncertainty there persists.
The ongoing push to transition to electrification also factors into the oil industry outlook. We could be on the precipice of a major energy revolution that could leave fossil fuels with much slower demand ahead. While this isn’t playing into oil’s near-term price action, it is something long-term investors should consider when choosing which oil stocks to buy.
With that in mind, here’s a look at three things set to drive oil prices in the second half of the year.
Oil Industry Outlook: Will We Have a Recession?
The recession question has become akin to the refrain you hear from kids on a long car journey, “are we there yet?” The answer, so far, is no. But that could change in the months ahead. So far, the U.S. has been able to skirt predictions it’s headed for a recession, with stronger-than-expected economic data and strong corporate earnings.
As the Fed continues to ratchet up interest rates, consumers are starting to feel the pinch. Things are more expensive, debt usage has increased, and spending will start to weaken. But that’s happening slower than many had initially expected. Now, it seems the U.S. may have a softer landing than anticipated, so while there could be a period of recession, it probably won’t be as deep or long as we initially feared. That would be supportive of oil prices.
There’s a similarly rosey story playing out in China, where Covid lockdown measures have only just been lifted. Consumers aren’t quite as resilient there as they’ve been in the U.S., in part because no stimulus checks were mailed to their doors. That’s meant that data coming from China is mixed. There’s been a quick recovery in activity, but the property market is weak and exports are on the decline. Chinese economic growth is expected to be slow at best, which could keep a lid on prices through the end of the year.
OPEC+’s Moves Could Counter Demand Issues
The oil industry outlook isn’t driven only by demand, supply also plays a role in anticipating where the price of oil could be headed. OPEC+, a coalition of oil suppliers including Russia, surprised markets back in April with an unexpected production cut. The group trimmed its supply by 3.6 million barrels per day (bpd), which is equal to just under 4% of total demand.
While unexpected, it’s not necessarily a shock. The group’s said it will keep supply tight in order to support prices. The move to trim supply could be a response to the International Energy Agency’s decision to release record amounts of oil from its reserves back into the market. Also in April, the IEA decided to send 120 million barrels into the market over the next six months to protect against volatility stemming from the conflict in Ukraine. This follows an earlier commitment from the U.S. government to draw down strategic reserves. Thus, a power struggle is ensuing among key players looking to impact global oil supply.
This push and pull on the supply side of the equation will have an impact on prices moving forward. While there isn’t any indication that OPEC+ will make further cuts, its commitment to protecting prices is clear.
Russian Sanction Revisions
The uncertainty that stems from the conflict in Ukraine has also had a major impact on the oil industry outlook, in terms of sentiment. The sanctions that stem from this conflict have impacted global oil supply. The EU, G7 and Australia have capped the price of Russian oil at $60 per barrel, and embargoed all refined oil products. So far, the impact on oil prices has been muted as Russia has been focused on diverting its supplies to countries that aren’t enforcing these sanctions.
That could change, though. The aim of the sanctions is to keep the price of Russian oil at least 5% below the market price. And although the sanctions are aimed at denting Russia’s export volumes, they may not be packing as much of a punch as intended. As the conflict continues to rage on, we could see the price cap re-evaluated and requirements for participating countries tightened. This would be supportive to oil prices.
On the date of publication, Marie Brodbeck did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
