Long term prospects for oil
However, in the long term, investors can feel a little more optimistic about the price of oil. As a result of government policies and the transition to more renewable forms of energy, investment in the oil industry has been somewhat ‘out of fashion’ for a while.
Thus, the industry faces some structural challenges that should cause prices to increase again in the future.
At a time when the world is facing an energy crisis and needs to increase supply, underinvestment in the oil industry will begin to push prices higher and increase the chances of energy scarcity.
Even before the war in Ukraine, the energy markets were already tight, with demand rising as the world reopened after the pandemic.
As such, the issues the oil industry faced before recent pressures on the sector – such as low commercial and strategic inventories or dwindling spare production capacity – still remain and will continue to make their presence known.
Consequently, supply will begin to be outstripped by demand, and prices should pick up once again.
In addition, we could see prices rise as the world’s economies begin to recover in 2023. In fact, according to the International Energy Agency, demand for oil will increase by a further 2.1mn barrels a day to a record high 101.8 mb/d next year.
As such, despite the economic slowdown that will hamper the oil markets for the next two to five months, we should see prices tracking higher later in 2023 because demand will remain high in the long term.
Even though it is difficult to foresee exactly how the coming months may unfold, recent volatility in the oil markets will obviously concern investors.
Although it is difficult to trade the commodity in the current climate, investors must recognise that the long-term prospects for oil remain relatively positive as the global economy recovers and demand begins to outstrip supply.
Giles Coghlan is chief market analyst at HYCM
