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ASX 200 oil stocks: where next as global recession fears rise?

High volume ASX 200 oil stocks are facing headwinds of uncertainty going into Q2. Where next?

asx oil Source: Bloomberg

The most-traded ASX 200 oil stocks — Santos (ASX: STO) and Woodside (ASX: WDS) — are facing multiple headwinds going into Q2 2023. For perspective, Santos shares are down by 10% and Woodside shares by 8.4% over the past year.

Meanwhile the ASX 200 is down by 4.9% over the same timeframe, and the ASX 200 Energy Index (ASX: XEJ) has lost over 1,000 points since 7 March. Brent Crude is now trading for circa US$75 per barrel — just US$5 below its 2021 average — and it was lower still only a few days ago.

And the future trajectory of both Brent, and by extension, Australia’s most important oil stocks is far from certain.

ASX 200 oil stocks: supply and demand

ASX 200 oil stocks are fighting a war on two fronts.

On the demand side, there are multiple concerns. The collapse of Silicon Valley Bank has clearly shaken the markets, as has the rushed merger of UBS and Credit Suisse to prevent the latter from collapsing into bankruptcy.

The US Federal Reserve, despite fears of a new global financial crisis, has increased the federal funds rate by another 25 basis points. In reality, the central bank had little choice.

A pause or pivot could send the message to the markets that it was abandoning the fight against inflation in favour of stability, while the previously anticipated 50 basis points rise could have instilled panic that further institutions, which have made long-term investing decisions on the erroneous assumption that rates would stay low for another decade, would be put under an unsustainable level of stress.

But investors worry that even this small rise could well ‘break’ more wheel and cogs in the global economic machine. And given the after-effects of the pandemic, supply chain issues, Ukraine War, and inflation, there were already fears that a global recession was imminent.

And this of course would hugely decrease demand.

There’s also the relative weakness of Chinese demand to consider; despite positive spin elsewhere, Chinese customs data cited by Reuters’ Asia Commodities and Energy journalist Clyde Russell shows that January and February saw crude oil imports into the country average 10.4 million barrels per day, down by 1.3% compared to the same period in 2022.

On the supply side, there’s a clear short-term oversupply of crude. The International Energy Agency’s monthly update shows that oil stockpiles are now at 18-month highs — driven partially by increases in Russian production despite ongoing international sanctions.

The IEA believes that ‘world oil supply should comfortably exceed demand in the first half of the year. Much of the supply overhang reflects ample Russian barrels...the country is still shipping roughly the same amount of oil to world markets.’

Where next for ASX 200 oil stocks?

Falling demand and oversupply could see oil prices — and by extension the best ASX 200 oil stocks — trend lower over the near term.

However, the outlook for oil, bar a cataclysmic economic shock, looks to be more robust from Q3 onwards. The IEA’s view is that Chinese demand will surge back later this year, an opinion also held by the OPEC cartel.

Commonwealth Bank analyst Vivek Dhar agrees that China and India will drive up demand for oil, with ‘deficit risks rising in H2 2023, as global oil supply growth, driven mainly by US, Norway and Brazil, fails to keep up with global oil demand growth.’ Dhar predicts that Brent will be trading for an average of US$88 per barrel through H2.

Meanwhile, Goldman Sachs has slightly revised its forecast down from US$100 to US$94 per barrel by the end of 2023, and to US$97 by H2 2024. In an interview with Bloomberg, its analysts noted that a gradual recovery seems the most likely option after ‘oil prices plunged despite the China demand boom given banking stress, recession fears, and an exodus of investor flows.’

Overall, this could leave ASX 200 oil stocks falling slightly through Q2 before recovering thereafter.

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