'We're in the early stages of a multi-year bull run for oil'

Capital Group experts believe there are opportunities for investors with a three- to five-year time horizon

'We're in the early stages of a multi-year bull run for oil'

After energy significantly outperformed every other sector over the past two years, the question on the minds of many investors is: is there more fuel in the tank for energy stocks?

As the price of the commodity directly affects the bottom lines of many businesses, historically, the trajectory of oil prices has been a reliable guide to assessing the sector's prospects. Yet, this long-standing association showed some flaws last year. Throughout 2022, oil prices were on a tumultuous rollercoaster, with year-end levels being close to where they started. The gains, however, were mostly retained by the oil sector companies.

What’s more, the advantages were not restricted to North America or Europe. The energy industry did, in fact, dominate all sectors, across all areas throughout the world except developing markets. Can the up cycle continue? Capital Group Equity Investment Analyst Craig Beacock thinks so.

Beacock, who recently returned from Saudi Arabia and Dubai after meeting with energy companies and government officials, said, “I believe we’re in the early stages of a multi-year bull run for oil.”

The energy industry, which is dominated by oil stocks, may not necessarily rise straight up as a result. He foresees times when the energy sector will lose momentum and either decline or move sideways.

“Amid long, uptrends there are also mini-cycles — some lasting months or even or a year or more — when short-term supply/demand trends outweigh longer-term supply/demand trends,” he said.

Yet, he believes that the industry offers plenty of opportunities for those who want to invest for three to five years in the future. Beacock is bullish for a variety of reasons, but the conflict in Ukraine is not one of them.

Two areas provide evidence that the conflict didn't have much of an impact. The first is the oil price, which is essentially where it was before Russia invaded the country, and the second is the continuous flow of oil out of the nation.

Structure-related changes have been made -- structural in that global spare capacity has not grown to the extent necessary to fulfill future requirements. Beacock predicts that this will have an influence on oil supply in the upcoming years as seen by growing OPEC+ production shortfalls and decreasing predicted global spare capacity.

He believes that Saudi Arabia and the United Arab Emirates could both expand their daily production capacity by one million barrels of oil each, respectively, of the main oil-producing nations. Nevertheless, building out the capacity will take time, and U.S. output is already slowing down significantly. There simply isn't enough oil, when combined, to increase the world's supply in the coming days.

The decline in reinvestment and overall industrial capital expenditures over the last ten years is one of the underlying factors. Environmental, societal, and governance considerations have contributed to the absence of new capex as well.

Beacock claims that there is pressure to invest more in low-carbon energy sources and less in companies that use fossil fuels. The shift is particularly strong in Europe versus Canada and the U.S., which may or may not prove to be a benefit for international firms in the years to come.

Investors may do well to take an active strategy based on in-depth, company-by-company study in the context of the volatile geopolitical and economic climate.

“Global energy investing is not nearly as straightforward or simple as it used to be,” says Equity Investment Specialist Kathrin Forrest.

According to her, an investment mandate that is flexible enough to invest internationally and consider consequences across linked sectors and industries may be beneficial. It not only helps portfolio managers to take advantage of global possibilities, but it also increases the benefits of portfolio diversity overall.

“There are also investment opportunities in companies related to energy that may be overlooked in sector-specific investment vehicles,” she said.