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It is fair to say that the oil industry has faced significant difficulties in 2022. With the war in Ukraine impacting supply, and fears of a global economic downturn threatening demand, the oil markets have experienced an unprecedented amount of volatility. Because of this, prices have been extremely unpredictable, rising beyond $100 every few weeks before falling once more. This makes trading oil in the short- to medium-term challenging for investors.

However, this is not a temporary issue. As long-term oil investors will know, volatility has defined the oil markets for a number of years. As such, with the commodity becoming increasingly challenging to trade, some investors may be wondering whether investments in the sector still provide the same value to their portfolios. 

That said, from November, OPEC+ members this week decided to cut their production of oil, which will decrease supply in the medium-term. As such, when combined with ongoing underinvestment in the hydrocarbons sector amid initiatives for a green transition and shifting government restrictions, we should see an imbalance between demand and supply that should boost prices higher. Consequently, in the long-term, perhaps investors could anticipate prices to stabilise and grow.

Investors in the oil industry still have opportunities, as always, but they need to be aware of the variables that may affect how the sector performs in the short-term, as well as the long-term.

Assessing the immediate future of oil prices

Future economic activity, supply, and demand all affect oil prices. As a result, given the impending recessions around the world, we should anticipate oil prices to stay low for the foreseeable future.

This year, the war in Ukraine has been a major factor influencing the price of oil. Prices have fluctuated wildly since the conflict first started, as well as rising significantly. For instance, oil traded at $52.2 a barrel at the beginning of the year. Prices jumped to $110/bbl after the crisis began in February, and then again to $139.13 on March 7 when the Biden administration decided to ban the import of Russian oil, the highest price per barrel since 2008. However, prices have once again dropped dramatically to $88/bbl at the time of writing. Russian oil exports – which account for 12% of the world’s supply – have been restricted by sanctions, which has led to a decline in supply and an increase in price.

However, price volatility has also been significantly influenced by declining demand. For instance, prices fell below $100/bbl once more in mid-March when China, the world's largest oil importer, imposed more lockdowns in response to an outbreak of Covid-19. Similar to this, new public health limitations implemented at the beginning of September led to a further decline by 3%. As a result of the closure of some of the nation's biggest ports, the Chinese economy is going through a severe slowdown, thus reducing demand.

As for global economic activity, the short- to medium-term doesn’t hold much promise. For instance, consumers can be expected to spend less money on the goods and services that prop up the oil industry – such as petrol and air travel – due to predictions of a recession in both the UK and Europe, as well as a forecasted downturn in the USA in 2023.

However, recent developments have shifted the narrative, and there is a better case for optimism in the medium-term than there would have been just a few days ago.

OPEC+ developments

Indeed, on 5 October OPEC+ members opted to cut their oil output by up to 2 million barrels per day, substantially reducing the volume of oil in the global market. As a result, this decision could result in a significant increase in demand as the West continues to grapple with sanctions on Russian exports and a dwindling supply of gas in Europe. With this in mind, we should prices pushing higher towards the end of the year than was previously expected, giving oil investors a greater sense of optimism for the future.

Oil's long-term outlook

Investors can feel a little more upbeat about the price of oil in the long run, as well. Investments in the oil business have been less than fashionable for some time as a result of government policies and the shift to more renewable kinds of energy. Therefore, the industry is starting to experience some structural difficulties that should result in future price increases.

For example, such a lack of investment comes are a time when increasing supply is needed to address a deepening energy crisis, increasing the chances of energy scarcity further down the line. Energy markets were already struggling prior to the Ukrainian crisis as demand increased as the world began to recover from the pandemic and supply chains continued to falter. As such, the problems the oil industry was experiencing before the current recent constraints on the sector — like depleted commercial and strategic stockpiles or declining spare production capacity — remain and will continue to be a problem. As a result, demand will start to outpace supply, and prices should start to rise once more. In fact, oil remains one of the most traded commodities.

Additionally, as the global economies start to recover in 2023, prices may increase. Indeed, the International Energy Agency projects that oil demand will rise by an additional 2.1 million barrels per day (mb/d) to a record high of 101.8 mb/d in 2023. As a result, despite the economic slowdown that will affect the oil markets for the next two to five months, prices should increase as long-term demand will remain high.

Investors will undoubtedly be concerned by the recent volatility in the oil markets even if it is difficult to predict how the upcoming months may play out. However, while trading the commodity is challenging right now, investors must understand that when the world economy improves and demand starts to outpace supply, oil's long-term prospects are still mostly encouraging.

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