Oil prices have been on a strong upward trend in recent months, reaching their highest levels since 2014. The main drivers behind this rally are a global supply crunch and a robust demand recovery as the world economy rebounds from the pandemic.
The supply crunch is caused by several factors, such as the OPEC+ alliance keeping production cuts in place, the US shale industry facing financial and environmental challenges, and the geopolitical tensions in the Middle East and elsewhere.
The demand recovery is fueled by the vaccine rollouts, the fiscal stimulus, and the pent-up consumer spending in major economies, especially in China and the US. The demand for oil is also expected to increase further as the winter season approaches and the need for heating rises.
According to Bank of America, oil prices could average $85 per barrel in 2023, up from $72 in 2022. The bank also said that oil prices could spike to $100 per barrel or higher in the event of a severe supply disruption or a faster-than-expected demand growth.
European stocks to benefit from higher oil prices
Higher oil prices are generally seen as a positive factor for European stocks, as they reflect a stronger global economic activity and boost the earnings of energy companies. Bank of America said that European stocks were set to outperform their US counterparts, as they have a higher exposure to cyclical sectors that benefit from higher oil prices, such as energy, materials, industrials, and financials.
The bank also identified three global stocks that are well-positioned to benefit from both rising gas and oil prices. These are:
- TotalEnergies, a French energy giant that has a diversified portfolio of oil, gas, renewables, and hydrogen. The company has a strong balance sheet, a high dividend yield, and a low carbon intensity compared to its peers.
- Enel, an Italian utility company that is a leader in renewable energy and grid infrastructure. The company has a solid growth outlook, a stable cash flow, and a commitment to decarbonize its operations.
- Linde, a German industrial gas company that is involved in hydrogen production and distribution. The company has a dominant market position, a resilient business model, and a strong innovation pipeline.
Risks and challenges of higher oil prices
While higher oil prices are generally beneficial for European stocks, they also pose some risks and challenges for the region. These include:
- Inflationary pressures: Higher oil prices could lead to higher inflation rates, especially in countries that are dependent on oil imports. This could erode the purchasing power of consumers and businesses, and force central banks to tighten their monetary policies sooner than expected.
- Competitiveness issues: Higher oil prices could hurt the competitiveness of European industries that rely on energy-intensive processes, such as steel, chemicals, and cement. This could affect their profitability and market share, especially against rivals from regions with lower energy costs.
- Environmental concerns: Higher oil prices could slow down the transition to a low-carbon economy, as they could reduce the incentives for investing in renewable energy sources and energy efficiency measures. This could undermine the efforts to achieve the climate goals set by the European Union and other countries.
Higher oil prices are likely to remain a key feature of the global economic landscape in 2023, as the supply-demand imbalance persists. This could have significant implications for European stocks, which could benefit from higher earnings and valuations, but also face some headwinds from inflation, competitiveness, and environmental issues. Bank of America has recommended some global stocks that are well-placed to capitalize on both rising gas and oil prices.