{"id":23055,"date":"2024-04-26T09:40:57","date_gmt":"2024-04-26T13:40:57","guid":{"rendered":"https:\/\/www.rbcwealthmanagement.com\/en-ca\/?p=23055"},"modified":"2024-04-26T10:03:52","modified_gmt":"2024-04-26T14:03:52","slug":"energy-stocks-a-hedge-to-rising-geopolitical-risk","status":"publish","type":"post","link":"https:\/\/www.rbcwealthmanagement.com\/en-ca\/insights\/energy-stocks-a-hedge-to-rising-geopolitical-risk","title":{"rendered":"Energy stocks: A hedge to rising geopolitical risk"},"content":{"rendered":"\n<p>\n      Oil prices surged to a six-month high in early April, underpinned by both\n      OPEC production cuts and demand being stronger than the market expected\n      thanks to resilient economies, particularly in the U.S. The ongoing\n      conflict in the Middle East has also given rise to a risk premium.\n    <\/p>\n    <p>\n      The fundamentals of the oil market today are strong, with the Organisation\n      for Economic Cooperation and Development\u2019s oil inventories below their\n      five-year average. The U.S. Energy Information Administration expects that\n      over the summer months, global oil production may not meet consumption,\n      which tends to stay strong due to the driving season and surging air\n      conditioning demand in the Northern Hemisphere.\n    <\/p>\n    <p>\n      Going forward, some opposing factors may affect global production, which\n      has already been restrained by the 2.2 million barrels per day production\n      cut OPEC put in effect in January 2024:\n    <\/p>\n    <ul class=\"list-spaced\">\n      <li>\n        The White House\u2019s reimposition of sanctions on Venezuelan oil, as the\n        Biden administration asserts that the Maduro government has failed to\n        make progress on free and fair presidential elections, cracking down on\n        the opposition.\n      <\/li>\n    \n      <li style=\"list-style-type: none;\">\n        Helima Croft, Middle East expert and RBC Capital Markets, LLC\u2019s Head of\n        Global Commodity Strategy, expects the reimposition of sanctions to have\n        limited impact. She believes the U.S. will grant direct licenses on a\n        case-by-case basis to international companies seeking to bring\n        Venezuelan barrels to the U.S.\n      <\/li>\n    \n      <li>\n        Saudi Arabia may gradually return some of its cuts to the market in the\n        summer, to secure the benefits from higher volume at a favourable price,\n        and perhaps to help key customers. Still, RBC Capital Markets doesn\u2019t\n        expect OPEC to make a concerted effort to increase production unless\n        there is a sustained supply outage. The cartel learned a painful lesson\n        in 2018 when it ramped up oil production to offset an expected\n        disruption in Iranian production. That shortage never materialized, and\n        prices retreated, hurting OPEC\u2019s profitability.\n      <\/li>\n    <\/ul>\n    <p>\n      Sustained supply shortages could, however, result from the recent military\n      actions in the Middle East.\n    <\/p>\n    <!-- ex 1 -->\n    <h3>Oil prices on the rise?<\/h3>\n    <h4>\n      Price per barrel of West Texas Intermediate (WTI) and Brent crude oil\n    <\/h4>\n    <div class=\"row mb-4\">\n      <div class=\"col-lg-10 col-md-8 col-sm-8 col-xs-10 col-xxs-12\">\n        <img decoding=\"async\"\n          src=\"https:\/\/www.rbcwealthmanagement.com\/en-ca\/wp-content\/uploads\/sites\/5\/2023\/02\/energy-stocks-hedge-risk-en-chart-1.png\"\n          alt=\"Price per barrel of West Texas Intermediate (WTI) and Brent crude oil\"\n          class=\"img-fluid mb-1-half\"\n          aria-describedby=\"chart1desc\"\n        \/>\n        <p\n          class=\"sr-only\"\n          id=\"chart1desc\"\n        >\n          The line chart shows the price per barrel of West Texas Intermediate\n          (WTI) and Brent crude oil since December 2021. During the period\n          shown, WTI reached its highest price of $123.70 per barrel in March\n          2022 and its lowest price of $66.48 a year later in March 2023. At the\n          beginning of January 2024 the price of WTI was $70.38; it subsequently\n          rose to $86.59 in early April, and is now just below $83\/bbl. Brent\n          reached its highest price during the period of $127.98 on March 8,\n          2022, and its lowest price of $71.84 in June 2023. It started 2024 at\n          a price of $75.89, peaked in early April at $91.17, and is now at\n          $88.35.\n        <\/p>\n        <ul class=\"rbc-legend rbc-legend-inline\">\n          <li class=\"rbc-legend-item\">\n            <div class=\"rbc-legend-line c-blue-tint-2\"><\/div>WTI\n          <\/li>\n          <li class=\"rbc-legend-item\">\n            <div class=\"rbc-legend-line c-dark-blue-tint-1\"><\/div>Brent\n          <\/li>\n        <\/ul>\n        <p class=\"disclaimer\">Source &#8211; Bloomberg; data through 4\/24\/24<\/p>\n      <\/div>\n    <\/div>\n    <!-- section -->\n    <h2>Clear and present danger<\/h2>\n    <p>\n      Geopolitical risk has been heating up since last autumn, and flared up in\n      April. After decades of clandestine and proxy warfare, Iran and Israel\n      launched direct military strikes on each other\u2019s territory. While Israeli\n      and Iranian leadership both seem to have designed their military actions\n      to avoid causing significant civilian casualties and infrastructure\n      damage, Croft contends the underlying regional dynamics remain\n      destabilizing and could take sudden escalatory turns.\n    <\/p>\n    <p>\n      She notes that a direct threat to regional oil supplies is possible in an\n      expanded war scenario, through attacks on tankers in the Strait of Hormuz\n      or on critical energy infrastructure in the region by Iran or Yemen\u2019s\n      Houthi rebels that it backs. Iran has already threatened to disrupt\n      shipping in the Strait of Hormuz as part of its strategic response to the\n      Israeli strike. In fact, Iran seized a vessel in those critical waters\n      hours before its drone and missile strike on Israel. In 2019, Iran\n      targeted tankers in this crucial maritime passageway that carries the\n      equivalent of 40 percent of OPEC production.\n    <\/p>\n    <p>\n      Croft\u2019s view is that current oil prices do not reflect the extent of the\n      escalation risk, even though they are elevated and already reflect a risk\n      premium. She believes a sustained de-escalation of tensions in the region\n      is unlikely. In addition to the potential for Israel-Iran clashes to\n      widen, she also cites the potential for escalation in the cross-border\n      conflict between Israel and Iran-backed Hezbollah in Lebanon.\n    <\/p>\n    <p>\n      If U.S. prices at the pump surpass the psychological threshold of\n      $4\/gallon nationwide, RBC Capital Markets believes the White House may\n      release more oil from the Strategic Petroleum Reserve (SPR) in an attempt\n      to cap prices during the peak summer driving season and ahead of\n      November\u2019s presidential election. Also, RBC Capital Markets thinks the\n      SPR\u2019s relatively low level of just over 350 million barrels, compared to\n      over 600 million in early 2022 before Russia\u2019s invasion of Ukraine, and\n      elevated oil prices may spur the White House to ratchet up diplomatic\n      efforts to effect a reversal of OPEC cuts at the cartel\u2019s next meeting in\n      June.\n    <\/p>\n    <!-- section -->\n    <h2>Capital discipline energizes Energy equities<\/h2>\n    <p>\n      Global energy share prices are up more than 10 percent since the beginning\n      of the year, buoyed not only by surging oil prices but also by underlying\n      fundamentals.\n    <\/p>\n    <p>\n      In recent years, faced with the threat of the energy transition, oil\n      companies have become more circumspect in allocating their capital\n      expenditure programs, focusing only on the most profitable\n      projects\u2014whether they are in the traditional oil industry or renewables.\n      Production from the global oil majors has grown only by low single digits,\n      but overall profitability seems well underpinned, in our view. The return\n      on equity ratio has increased to 14 percent compared to the 44-year median\n      of 12 percent, according to Paul Danis, head of asset allocation at RBC\n      Brewin Dolphin.\n    <\/p>\n    <p>\n      Going forward, Canadian oil companies have the additional benefit of the\n      long-awaited Trans Mountain Pipeline Expansion (TMX) coming on stream in\n      Q2 2024. The pipeline system will carry crude and refined products from\n      Alberta to Canada\u2019s West Coast, providing oil producers with the ability\n      to reach new markets.\n    <\/p>\n    <p>\n      Oil companies\u2019 new capital discipline has enabled most producers to focus\n      on improving returns to investors via share buybacks and dividends. The\n      global Energy sector currently possesses a 12-month trailing dividend\n      yield of 3.6 percent, well above the 2.3 percent yield for the MSCI All\n      Country World Index (MSCI ACWI).\n    <\/p>\n    <p>\n      Even after the recent rally in Energy stocks, the global sector currently\n      trades at a 36 percent discount to the MSCI ACWI on a 12-month forward\n      price-to-earnings basis. According to Danis, this reflects a challenging\n      structural growth backdrop driven by the shift away from fossil fuels and\n      the rise of clean energy.\n    <\/p>\n    <p>\n      Oil companies can provide a hedge against geopolitical risk and a possible\n      supply shock, in our view. The sector strongly outperformed the broad\n      equity market during the three oil supply shocks since the 1970s.\n    <\/p>\n    <p>\n      However, investors should be mindful that oil stocks are not very\n      sensitive to interest rates given their low valuation multiples, and have\n      thus done relatively well in the rising inflation and interest rate\n      environment. If, as we believe, bond yields are close to their peak, this\n      performance tailwind may well be removed. Moreover, by realizing\n      substantial profits thanks to prudent investment in their core businesses,\n      oil companies in Canada, the UK, and Europe risk becoming targets again\n      for further windfall taxes. This could affect investor sentiment.\n    <\/p>\n    <p>\n      Weighing the opportunities and risks, we suggest portfolios should have a\n      position in Energy stocks at least in line with relevant equity benchmarks\n      given undemanding valuations, ongoing capital discipline, and the elevated\n      risk of an oil supply shock.\n    <\/p>\n","protected":false},"excerpt":{"rendered":"<p>Oil\u2019s rally is fueling an intriguing opportunity. We contend the global oil sector is benefiting from improved fundamentals and exposure in equity portfolios can act as an offset to geopolitical risk.<\/p>\n","protected":false},"author":15,"featured_media":23056,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"rbcwm_post_date":"2024-04-25T09:26:44","editor_notices":[],"rbc_url_alias":"","rbcwm_featured_desktop_image_position":"","rbcwm_featured_mobile_image_position":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[73],"tags":[121],"rbcwm_content_owner":[607],"rbcwm_need":[],"rbcwm_segment":[75,66],"rbcwm_solution":[],"rbcwm_topic":[74],"rbcwm_channel":[],"rbcwm_format":[],"class_list":["post-23055","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-analysis","tag-geopolitical-risk","rbcwm_content_owner-pag","rbcwm_segment-business-owners-and-entrepreneurs","rbcwm_segment-individuals-and-families","rbcwm_topic-global-insights"],"acf":{"rbcwm_subtitle":"Oil\u2019s rally is fueling an intriguing opportunity. We contend the global oil sector is benefiting from improved fundamentals and exposure in equity portfolios can act as an offset to geopolitical risk.","rbcwm_post_author":[1340],"rbcwm_custom_breadcrumb_text":"","rbcwm_custom_breadcrumb_link_url":"","rbcwm_disclaimers":{"add_disclosures":["Yes"],"perspective_disclaimer":"","expandable":"","omit_from_pages":[],"disclaimer_footnote":""},"rbcwm_insight_cta_id":[11937],"rbcwm_pagination":{"next_link":"","next_link_text":"Next article","previous_link":"","previous_link_text":"Previous article"},"rbcwm_video_duration":"","article_time":"","rbcwm_enable_toc":false,"rbcwm_toc_selector":"h2"},"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.8 (Yoast SEO v26.8) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Energy stocks: A hedge to rising geopolitical risk<\/title>\n<meta name=\"description\" content=\"Oil\u2019s rally is fueling an intriguing opportunity. 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