Citigroup Inc. said oil prices may hit $90 a barrel at times this winter as gas-to-oil switching drives stockpiles lower.
The bank, which raised its Brent oil forecast for the fourth quarter to $85, said inventories may dwindle to their lowest level on record in terms of days-of-cover by year-end. That comes as consumption gets a boost of as much as 1 million barrels a day from consumers switching away from natural gas to oil-based products amid surging energy prices.
Fiona Cincotta, senior financial markets at City Index.
Even Opec adding back supply to the market is not “necessarily going to have a massive impact on cooling the price of oil. Oil to $90 is clearly in sight”.
Citi raised its Brent price estimate for this quarter to $85 a barrel, potentially increasing to as high as $90 at times, on “higher demand, lost supply, gas-to-oil switching, and price contagion this winter”, according to a report.
Various underlying oil market gauges are showing signs of strength.
Still, there is a possibility that signs of slowing global growth — partly because of soaring energy prices — will ease some of the demand pressure on crude.
Goldman Sachs Group cut its forecasts for US expansion this year and next, blaming a delayed recovery in consumer spending. The energy crises in China and India may also lead to a slowdown in Asia.
Prices for coal, gas, and electricity have also surged to record highs in recent weeks, driven higher by widespread energy shortages in Asia, Europe, and the US.
Qatar, the world's largest seller of liquefied natural gas, told consumers it was powerless to cool energy prices as British steelmakers said they could be forced to halt output in the face of soaring costs.
In India, some states are experiencing electricity blackouts because of coal shortages. China's government, meanwhile, has ordered miners to ramp up coal production as power prices surge.
Meanwhile, Britain's business minister Kwasi Kwarteng has submitted a formal bid to the finance ministry for assistance to help industries affected by high energy prices, the BBC has reported.
UK producers of steel, glass, ceramics, and paper and other sectors have said they may be forced to halt production unless the British government does something about energy prices, which have rocketed due to a shortage of natural gas in Europe.
Oil prices aren’t slowing down and play the rebound with these stocks
The price of oil keeps rising, and the stocks of oil companies with it. Now, some analysts think the strategy of how to play the rebound is changing, too.
For much of the past two years, investors and analysts have been focused on which oil companies can keep their costs down and send more of their profits back to investors as dividends and share buybacks. That’s led to more companies reducing their drilling budgets, paying off debts and slowing down plans to explore for new oil deposits.
But there’s a counterargument to that strategy.
There’s evidence now that demand for oil and gas isn’t going away in the near term, and the next few years will actually be characterized by high prices and underinvestment. That’s why Saudi Arabia is investing in expanding its production capacity to 13 million barrels a day from 12 million, even as U.S. and European oil firms slim down and reduce production.
Goldman Sachs analyst Neil Mehta thinks that investors ought to consider companies that have access to long-term sources of oil and gas. Mehta picked eight of those companies as potential investments that can pay off over time as oil prices stay high amid a supply shortage.
Goldman forecasts that the world will use 106 million barrels of oil per day in 2030, versus assumptions from European oil companies that demand will be around 100 million barrels.
The eight stocks should return 18% in the next year, on average, Mehta predicts.
Hess (ticker: HES) owns a stake in a major oil project off the coast of Guyana in partnership with ExxonMobil (XOM) and Chinese company CNOOC (883Hong Kong) that is expected to produce considerable amounts of oil for the next decade. Mehta expects the company to increase its cash flow by 15% a year through 2030, from $10 per share this year to $30 in 2030. He sees shares rising to $106 from a recent $92.
Exxon’s Guyana project, and its refining, chemicals and liquefied natural gas divisions give it one of the strongest asset bases in Big Oil, according to Mehta. He sees shares rising to $68 from a recent $62.50.
Pioneer Natural Resources (PXD) has one of the largest positions in the Permian Basin that Mehta expects to pay dividends for years — literally and figuratively. Pioneer has a variable dividend policy that could offer investors a dividend yield of 11% in 2022, Mehta estimates. He sees shares rising to $213 from a recent $196.
Occidental Petroleum (OXY) has been held back for the past couple of years because it added substantial debt when it bought competitor Anadarko Petroleum. But investors may be overlooking the strength of its resource base in the U.S. and Middle East, as well as its chemicals division, Mehta asserts. He sees shares rising to $40 from a recent $34.
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