Oil Market Dynamics: Sentiment shift and the outlook for LSE listed companies
In recent months, the international oil markets have been dominated by a shift in sentiment rather than fundamental factors. While the United States was once a significant player, its position has weakened due to President Biden’s foreign policy decisions. The panic over fuel prices leading up to the midterms, along with the surprise release of 180 million barrels from the strategic reserve, has notably undermined the US’s standing. Consequently, this turn of events has handed the initiative back to OPEC (Organization of the Petroleum Exporting Countries) and its allies.
OPEC has struggled to meet its production quotas over the past 18 months. Nonetheless, the recent production cuts announced by OPEC and its allies suggest a greater likelihood of meeting their targets. These reductions, while symbolic in nature, hold sway over the market, enabling OPEC to dictate price movements.
Within this context, it seems that OPEC’s preferred oil price range is between $80 and $90 per barrel. Prices exceeding $100 per barrel may raise concerns about inflation and hinder the nascent global economic recovery. By striking a balance between satisfying domestic needs and maintaining control of the market, OPEC aims to optimize its position without pushing for excessively high oil prices.
Oil & Gas analyst Ashley Kelty discusses the themes of this article in the film below, which was produced as part of our work with Interactive Investor, one of the UK’s largest execution platforms
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Predictions for the next 12 months suggest a bullish outlook for oil prices. Experts anticipate prices to surpass $90 per barrel later this year, with the potential to even reach $100. However, sustained levels above $100 are not expected, as OPEC would likely respond by increasing supply to prevent any adverse impacts on the Chinese recovery and global economic growth. Therefore, maintaining a price range of $80 to $90 per barrel seems ideal for OPEC’s interests.
In terms of oil companies, the investment landscape has experienced a shift in perspective. While last year saw a focus on gas-oriented companies due to high gas prices, recent developments, including an increase in oil prices and weakened gas prices, call for a more balanced approach. The outlook is further complicated by windfall taxes and heightened taxation levels in the UK and proposed in Europe. These factors have adversely affected the prospects of UK companies, highlighting the importance of undertaking projects and exploration to leverage investment allowances and mitigate the impact of energy profit levies.
A notable example is Serica Energy (LON: SQZ) acquisition of Tailwind, which not only rebalanced its portfolio but also provided opportunities for investment. Companies with substantial projects and exploration capabilities can navigate the challenges posed by taxes more effectively. Harbor Energy’s (LON: HBR) partnership with BP (LON: BP) in the Viking carbon capture project showcases an interesting move, bolstering their prospects of receiving government support. Smaller, independent operators might face greater scrutiny, with the government preferring well-capitalized, experienced companies for such initiatives.
Among the companies showing promise, Kistos Holdings (LON: KIST) stands out with its diversified portfolio in the UK and Netherlands, along with its high-impact project west of Shetland. This venture will help offset the effects of energy profit levies. Kistos has also displayed a strong acquisition strategy, and another deal could be on the horizon if favourable terms are reached. Despite concerns surrounding mergers and acquisitions due to environmental regulations, Jersey Oil and Gas managed to secure a farm-out deal, demonstrating the ongoing potential for such transactions.
Other noteworthy projects, albeit smaller in scale, include Orcadian Energy (LON: ORCA) in the UK and Jadestone Energy in Asia (LON: JSE). While Jadestone Energy faced difficulties last year due to the temporary closure of one of its fields, the resumption of production should lead to a recovery in its share price.