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Can oil resume flight?

The Energy sector hasn’t seen much love in recent years. The benchmark US index has been in a dramatic bear market since 2014, while the ASX sector, has at best, treaded water since the GFC. Oil companies had already been forced to slash exploration projects, even before the effects of COVID-19 decimated the world’s demand for the resource.

However, with producers cutting their drilling and exploration projects, coupled with the multi-year lag it takes from the time of discovery to creating a producing well, the lack of supply could potentially lead to shortages in the future. Particularly if demand surges back to normal as global economies recover.

The COVID-19 pandemic has forced businesses and governments to consider and rethink global supply chains in light of continuing lockdowns. The effort required to build infrastructure and capabilities locally, should, in any case, contribute to a recovery in the demand for fossil fuels.

What does this mean for investors?

Australian’s have no shortage of options for exposure with the likes of Origin, Beach, Santos, Woodside and Oil Search. However, while vaccine sentiment is currently high with both Pfizer and Moderna having released positive trial results; the road to a return to normal is still long and uncertain.

The sugar-hit from positive vaccine news has historically been short-lived as markets quickly focus on other issues. For the recovery to last, it will be critical for efficacious vaccines to become widely available soon, so that mass vaccination can lead to a strong rebound in demand as people start travelling again.

Investments in oil are no doubt still subject to heightened volatility and uncertainty, coupled with the push towards renewables, investors would be forgiven for reducing exposure. However, the prospect of a return to normality certainly justifies their place as a contrarian play, for those happy to hold in the search for a brighter economic and global recovery.

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