The fundamentals of supply and demand are the basics of evaluating price. For U.S. oil prices that under the U.S. President Donald Trump administration shifted to a drill-baby-drill policy as green energy is seen as a hoax, the industry has not increased production at all. Rig counts continue to slide as Organization of the Petroleum Exporting Countries (OPEC+) plus has implemented policies to increase output.
Of course, the post COVID-19 response was an anomaly (we hope), but in the post fracking boom a decade ago, rig counts at these levels proved to be a good buying opportunity.
We do know that the strategic petroleum reserve (SPR) needs to be rebuilt. The Russia-Ukraine shock response is slowly replenishing, but this implies that there is huge demand below the market to support the rebuild. The pace of replenishment is slow as to not push prices higher. An escalation of the conflict does pose a supply shock risk and the U.S. is not prepared for it.
The current shape of the forward curve is in backwardation front months higher priced than six to 12 months from now. This is a near term positive factor, but as we can see going out to 2035, prices are expected to remain in a relatively tight range.
From an investment standpoint, most of the leverage comes from the exploration and production companies that mostly focus on the development side versus the fully integrated companies that refine and sell the end products. Since the Russia-Ukraine war spike in early 2022, the sector has been range bound. We do not see this changing, and investors should be focused on buying into periods of weakness, not chasing strength and looking for a breakout. For the yield seekers, if the sector is likely to remain range bound, have a look at Canadian and U.S. equities, Canadian and U.S. equities and Canadian Equities only.
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