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.
What Are the Risks?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector. Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.
Important Legal Information
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realised. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Distributors, LLC, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com – Franklin Distributors, LLC, member FINRA/SIPC, is the principal distributor of Franklin Templeton U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.
CFA® and Chartered Financial Analyst® are trademarks owned by the CFA Institute.