With a 38% increase, energy was the best performing sector on the ASX last financial year. In this short video, Stephane Andre, Principal at Alphinity Investment Management, outlines the fundamentals behind the strong oil price, and which two energy companies his fund continues to hold.

Key points

• The oil market is tight: Demand is strong at 1.5-1.7 million barrels a day, inventories are below long-term averages, and OPEC is facing challenges such as falling production from Venezuela and the flow on from sanctions on Iran.
• The market is therefore quite ‘fragile’, with little capacity for further supply disruptions before upside risk for the price emerges. In addition, years of inadequate capex investment will translate in to price support over the medium-term.
• Market is expecting a ‘floor’ of $65, however if there is a recession, ‘all bets are off’ and the price could fall to $45.
• Electric vehicles pose no threat to oil until 2025-2030, and impact will be incremental. Is not a risk that is front of mind at present.
• Two preferred exposures are Beach and Woodside, both offering a lot of upside from their assets.