Devon Energy (NYSE: DVN) is poised to benefit from a couple of tailwinds for its gas and oil commodities this year.
These tailwinds also coincide with Wall Street’s estimation of the stock’s performance in the foreseeable future. The stock is rated as a moderate buy, and according to the MarketBeat consensus price target, it has a 37.7% potential upside at the time of writing.
Furthermore, the company is expected to receive a slight bump in earnings. It’s believed Devon Energy’s earnings per share (EPS) will grow 1.96% from $8.66 to $8.83 per share.
So let’s examine the headwinds that may propel Devon’s Energy stock in 2023.
Higher crude oil prices
Global energy prices are set to increase this year, and crude oil is expected to come out on top. This is according to a report published by UBS Group (NYSE: UBS) earlier this week.
A few key catalysts will drive the prices of energy commodities. These include China’s reopening, increased demand from developing economies such as India, and upstream constrictions on Russia’s oil production from the EU.
The bottom line is that UBS expects oil prices to increase to USD 100/bbl in the near future and expects Brent crude to peak at around USD 110/bbl near the middle of this year.
Putting this forecast in perspective, the price of WTI crude is currently $78.05 at the time of writing. This means UBS is expecting a 40.93% upside, with the commodity making an average price gain of around 6.5% per month to get there.
But China is the wildcard
However, one significant assumption is being made with this forecast: there will be only a shallow global recession. If the recession is deep, as some experts suggest, then Brent crude could see an average price of only $89.37 a barrel throughout the year.
A basic summary of this argument is that the world’s economic centers, which include China, Europe, and the United States, could enter a recession simultaneously, which will be the first time in forty years.
The world’s demand for key commodities such as oil and steel mostly hinges on China’s domestic consumption. One play China has made in the past when facing an economic crisis is to rapidly increase spending on infrastructure. This is how China insulted its economy during the global financial crisis in 2007-2008, buoying major export economies such as Australia.
How China responds in the first quarter after reopening may be the deciding watershed moment for the oil outlook this year and how deep the recession will run internationally.
In August, China said it would commit one trillion dollars towards building out its infrastructure projects, per Bloomberg, so that it may return to its old playbook.
Natural gas to rise
The other half of Devon Energy’s products are in natural gas, which is expected to make a comeback, according to Capital.com. The commodity slipped from a high of $9/MMBtu in August last year and has since fallen to around $3.7/MMBtu at the time of writing.
After the market recovered from supply shocks and tapered off from the US’s increased LNG exports, the commodity price has been in a free fall.
However, the most profitable time of year for natural gas exports is just after the winter in Europe has ended, which will be near the end of the first quarter of 2023.
This will be when Europe is expected to replenish its natural gas reverses and may lead to a significant uptick in demand for the commodity. By analyzing the market’s response to its support and resistance zones, a commodity price between $5 and $8 seems likely, the article said.
Another factor that will play a part is how cold the incoming winter will be. Cold winters will mean more gas will be used, thus commanding a higher commodity price, while a warmer winter will keep more gas in the coffers.
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