Risks to the market rally are rising; oil stocks a good bet: Chris Wood

Energy-related stocks remain the best hedge against a Ukraine-triggered spike in energy / oil prices, Wood said

Risks to the rally in the global equity markets – especially arising from geopolitical shocks – are rising, wrote Christopher Wood, global head of equity strategy at Jefferies in his recent note to investors, GREED & fear. This, he wrote, can see oil prices climb higher going ahead.

"GREED & fear is not just referring to the ongoing escalating tensions between US and China, but also the growing likelihood that markets start to react to news flow on Ukraine again, having essentially ignored the conflict for the past several months. Here the concern is again the increasing threat of escalation," he wrote.

US' formal raising over the past week of the issue of the potential supply of arms to Russia by China has once again linked the issue of Ukraine and US-China relations, as was also the case at the start of the conflict almost a year ago to the day. Meanwhile, the economic links between Russia and China are growing.

"Ukraine still has the potential to trigger massive market movements, most particularly in terms of a renewed surge in energy prices, which would both undermine still lingering hopes of a near-term end to Fed tightening and trigger renewed concerns about accelerating monetary tightening,” Wood said.

As an investment strategy, Wood suggests investors hold on to energy-related stocks in their portfolios as they remain the best hedge against a Ukraine-triggered spike in energy / oil prices.

Meanwhile, reports suggest Russia plans to cut oil exports from its western ports by up to 25 per cent in March, exceeding its announced production cuts of 500,000 barrels per day (b/d). This sparked a rally in Brent crude oil prices, which rose over 3 per cent on Friday to around $84 a barrel.

A 500,000 b/d cut, Wood believes, is not inconsequential given Russia's crude oil production of 10m b/d.

“With global oil demand running at 100m b/d, and with China's re-opening likely to lead to another 1.5m b/d of demand as the year progresses, the potential for Russia to play the oil card is growing," he said.

Oil on the boil

That said, most analysts had pegged oil prices to remain firm for most part of calendar year 2023 (CY23) while releasing their forecasts for the year a couple of months ago.

Morgan Stanley, for instance, had expected Brent crude oil to rise up to $110 a barrel in the second half of 2023 (H2-CY23) – up around 33 per cent from the current levels. On the other hand, those at JP Morgan had expected Brent to average around $90 a barrel in 2023.

Asian oil buyers, according to S&P Global, would still be hoping for a return of Iranian crude, even though chances might be slim. Iranian crude, they believe, could potentially bring relief to market supply at a time when the tug-of-war between Asia and Europe for Middle Eastern crudes looks to intensify.

"Calendar year 2023 will be a dramatic one for Asian oil markets. From increased diversions of Russian crude to Asia to the increasing need of oil products by Europe from around the world including Asia, the list of factors to dominate the headlines will be long. Additional key factors to watch include demand recovery in China and its oil product exports, the growth of jet fuel demand in Asia as a whole, as well as the region's refinery run rates," said Kang Wu, head of global oil demand and Asia Analytics at S&P Global.