From pushing down crude oil prices on sentiment about weak Chinese and Indian import demand earlier in the week, traders have realised later in the piece that global inventories are rather tight.

The black gold sure is a difficult commodity to pick. But as with the Ecuadorian woman who knocked on her coffin during her own wake, we reckon any death knell for oil is woefully premature, despite the weak economic vital signs and the rise and rise of renewable energy.

At the bowser – metaphorical or otherwise – it’s still a case of “fill ‘er up”. According to the Organisation of Petroleum Exporting Countries (OPEC), humans guzzled 91 million barrels per day (yes – per day) in 2013 and a tad under 100 million barrels in 2022. This year it is on track to consume more than 102 million barrels.

Even in the 2020 pandemic year when oil prices plunged, 91 million barrels were consumed.

Brent crude hit a decade high of $US112 a barrel in June last year, slumping to around $US70 a barrel in May this year. The price is currently lingering around $US85 a barrel.

But have recession fears already been built into valuations?

Citi estimates calendar 2023 demand uptick of 1.6 million barrels, with 2024 demand expected to be 1.7 million barrels. However “risks are to the downside”, which in broker speak means investors could yet slip in a humungous oil slick.

Of the 2023 increase, China is expected to account for 800,000 barrels – but by 2025 India is forecast to overtake China as the biggest oil user.

Simon Mawhinney, chief investment officer of local active fundie Allan Gray Australia says the market is “quite negative disposed to energy prices,” with consensus forecasts pointing to declines from here.

There’s a ‘but’, but: “It’s our view those falls are unlikely to take place and certainly not for a long period of time,” he says. “We feel the energy companies are reasonable investments at current oil prices.”

Mawhinney believes Woodside Energy (ASX:WDS) would be able to weather a price downturn, given its long-life assets and lower per value operating costs.

The sector leader with a $72 billion market cap, Woodside has cemented its top-dog position after merging with BHP’s hydrocarbons business.

Woodside kicked a winner last week by selling a 10 per cent equity stake in the Scarborough gas field to LNG Japan for $US880 million.

Apart from a higher-than-expected price, the deal is expected to forge a closer alliance with LNG Japan owners Sumitomo and Sojitz Corporation.

Lower LNG pricing is also expected to take the gloss of the results of Santos (ASX:STO) and Origin Energy (ASX:ORG) – if only in the short term.

Investors may be better served by up-and-coming mid-tier producers with promising exploration and development potential.

RBC Capital Markets energy analyst Gordon Ramsay (not the chef) expects the most valuation upside from the middle-ranking Cooper Energy (ASX:COE), courtesy of its existing Victorian production.

This means Cooper is well placed to exploit the looming east coast gas shortage – exemplified by the Victorian Government’s mandate that new dwellings cannot have gas connections from next year.

Similarly, broker Wilsons expects Beach Energy (ASX:BPT) to benefit from the east coast gas squeeze, with its offshore Victorian and onshore South Australian output. A three-well drilling campaign in the Perth Basin also has enormous potential.

The X factor is last week’s sudden change of CEO at the Kerry Stokes-controlled Beach, with Morne Engelbrecht ceding in favour of former Santos executive Brett Woods.

Back to the big picture: on Wilson’s reckoning, there’s been a massive $US1.1 trillion underinvestment in upstream oil and gas exploration and development, at a time of increased demand from developing (non-OECD) countries.

As with the Stone Age, the hydrocarbon era will peter out, but in the meantime it’s a case of ‘oil’s well that ends well’.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.

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