Complaints about high energy prices have long appeared in the media. End consumers and businesses alike suffer from historically high oil and gas prices. Investment bank analysts JP Morgan & Chase now warn in a July 1 letter to shareholders. (2022) ahead of astronomically high oil prices, well above current levels.
The question arises, what would be the consequences of a possible slump in the forecast for companies from the energy sector and whether it could result in investment opportunities for investors.
The main American bank assumes that further sanctions in the east may lead to a decline in oil production, and that excessive demand may push the price of oil to USD 380. In particular, the European Union is discussing sanctions in the form of a price cap on Russian oil. In return, the EU could be “punished” by reducing Russia’s oil output.
A counterattack that could theoretically be launched due to the large oil reserves. In addition to the possibility of implementing these sanctions, it raises the question of what consequences for the world economy may an unstable change in supply and demand for raw materials.
Hand in hand with the US dollar
It is known that supply and demand determine the price. However, trading in liquid gold also has ramifications for the US dollar, as has been seen, for example, in the oil embargo on Iran.
Due to the sanctions imposed on the country and the associated decline in supply, the price has logically increased. In addition, the commodity is traded in US dollars and traders need to stock up on currency in order to trade oil on the futures markets.
Ultimately, this combination also strengthens the US dollar and carries ongoing currency risk for many European companies that depend on imports.
winner of the crisis
The energy sector has performed the worst in recent weeks (June 2022) due to growing fears of recession and the accompanying economic slowdown. While crude oil grades remain high, the uncertainty about a potential downturn in demand has been volatile in the futures markets. Nevertheless, the current price situation may have a positive impact on the business development of these companies in the energy sector in the medium and long term.
One of these potential winners could be Exxon Mobil Corp. A global Texas-based company is active in the oil and natural gas areas and therefore could be one of the beneficiaries of high commodity prices. According to a report by JPMorgan & Chase analysts, short and medium-term Brent Crude oil prices above $ 80 per barell are sufficient to provide the company with sufficient cash flow for higher dividend payouts and share buyback programs.
Both capital measures could have a positive effect on movements in Exxon’s stock price. Finally, the higher cash flow also benefits the group due to the mountain of debt which it was able to accumulate mainly due to the decline in demand for many commodities in the initial stages of the blockade.
On Bloomberg, 13 analysts buy stocks, 17 hold them, and 1 analyst sells, with an average 12-month target price of $ 102.50.
challenges for the industry
For short to medium-term investors who believe in future oil price dynamics, consider introducing the (worst) Quanto Multi-Reverse Convertible Note on BP, Exxon Mobil and Shell.
On the other hand, for long-term market participants, the decarbonisation goals of the ‘Paris Agreement’ should not be underestimated, as energy companies can only achieve their ‘net zero emissions’ targets by reducing profits or increasing spending. According to their own statements, companies such as “BP PLC” and “Royal Dutch Shell” are trying to reduce their emissions by more efficient extraction or elimination of flares.
In the distant future, these costly activities could create severe pressure on margins if commodity prices fell and demand fell due to alternative energy sources. We will see how companies intend to strategically adapt in this regard.
In addition to the classic inverted convertibles, Vontobel also offers the opportunity to participate in the relevant trend with a certificate of participation.
Currency risk: As the currency of the Base Index is US Dollars and the Index contains stocks and securities denominated in currencies other than Euro (e.g. US Dollars), the value of the Certificate also depends on the exchange rate between the relevant foreign currency (e.g. US Dollars). .and euro (certificate currency). As a result, the value of the certificate (in Euro) can fluctuate significantly over the period of validity.
correlation risk: Multi Reverse Convertibles with Barrier (worst of): This type of Reverse Convertibles applies to several underlyings. The degree to which the performance of the Underlying Constituents is interdependent (the so-called correlation) is therefore crucial for assessing the risk that at least one Underlying Constituent will hit its barrier. Investors should note that if there are several Underlying Constituents, the worst performing Underlying Constituent during the life of the Securities is decisive in determining the Payout Amount (the so-called worst structure). The risk of losing your invested capital is therefore much higher with the worst structures than with securities with only one underlying.
Market risk / price risk: The value of the certificate may also fall significantly below the purchase price during the period due to factors that determine the market price in the event of a decline in the value of the underlying.
Issuer / credit risk: Investors are exposed to the risk that the issuer and guarantor will not be able to meet their obligations under the product and guarantee – for example in the event of insolvency (insolvency / over-indebtedness) or an official corrective action order. Such a resolution by the resolution authority may also be made in the run-up to insolvency proceedings if the guarantor is in a crisis situation. It is possible to completely lose your invested capital. The product as a bond is not subject to any deposit insurance.
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