Energy

We build a four-stage business cycle framework based on economic growth and capacity utilization, and then analyze historical returns for most major asset allocation decisions for each stage. Given that we are in the early recession stage (negative growth coupled and an overheated economy), our framework recommends a defensive positioning across all asset classes.

In this Strategy Outlook, we present the major investment themes and views we see playing out for the rest of 2023 and beyond.

China’s economic and diplomatic interests in the GCC region will expand, as will its military presence. Whether or not this stabilizes the region is yet to be determined, particularly if tensions in the South China Sea and other international waters traversed by both the US and China escalate. Underlying risk in energy markets will remain elevated. We remain bullish energy generally, and continue to favor equity ETF exposure to energy (XOP and XME), and commodity exposure via the COMT ETF.

The attempted coup in Russia produced subdued short-covering rallies in oil, gas, and grains markets, as markets over time have observed that coups, rarely result in loss of production and exports. Markets await Putin’s next move. Unless and until a viable threat to the Putin government emerges, markets will continue pricing in fundamentals prevailing prior to Saturday’s attempted coup. We are keeping our base case brent and henry hub natgas price expectations unchanged.

We are strategically bullish on the outlook of the energy sector. Domestic and external political constraints asserted themselves, restraining the most negative impulse against this sector by the Biden administration. Go long energy versus cyclicals (ex-tech).

The normalization of oil storage markets in the Northern Hemisphere; strong demand, aided by China stimulus this year; and continued production discipline supports our view Brent prices likely have bottomed, and will move higher from here. We raised our 2023 Brent forecast $2/bbl to $92/bbl. Our forecast for next year is revised upward by $5/bbl to $120/bbl. Price risk remains to the upside, particularly if KSA exercises its option to extend production cuts of 1mm b/d.