Beyond Bulls & Bears


Quick Thoughts: Energy Prices—Over the Barrel

Head of Franklin Templeton Investment Institute, Stephen Dover, hosted a special webinar to discuss rising oil prices and the fundamentals that would impact them in the future. Here are the key takeaways from his conversation with Frederick Fromm, Portfolio Manager and Energy Sector Research Analyst for Franklin Equity Group.

Listen to our podcast for the full conversation below. 

Here are key thoughts:

  • Tight inventories and rising demand created an upward pressure on oil prices, even before the war in Ukraine. Sanctions against Russia have created additional strain on the oil supply, while demand for oil has already surpassed pre-pandemic levels, with international travel not yet fully restored.
  • Different grades of oil are hard to replace. Crude oil is refined into consumable products (such as gasoline, diesel, kerosene, etc.) with each refinery capable of processing specific grades of crude oil. For instance, China may have limited capacity to process the medium sour type of crude that is produced in Russia, while India can process various grades of oil and hence, has more flexibility to change suppliers.
  • Higher oil prices should incentivise production. Oil companies have reduced investment in expanding production and exploration based on the history of lower oil prices and environmental concerns. Currently, there is limited capacity to increase oil production with the existing facilities. Additional capital investment will be needed, and companies are unlikely to invest unless they think oil prices will stay elevated.
  • Natural depletion of oil production capacity at the wells suggests the need for increased production elsewhere. Oil production at any given well normally drops 3%-5% per year. The increase in production in Guyana and West Africa is not sufficient to replenish the depletion of existing wells, requiring more oil production elsewhere.
  • Investments in renewables are crucial to reduce the dependency on oil and gas, especially amidst the war in Ukraine. The cost of raw materials has increased, but this has not stalled renewable energy. As countries look to reduce dependence on Russian oil, the opportunity in renewable energy remains high, in our view.

As we continue to process the many immediate and potential impacts of the war in Ukraine, I want to personally acknowledge the loss, grief, and uncertainty being faced by so many in the current situation.

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