TSX is commodity-heavy

Oil is one of my top sector picks for 2023. I am bullish on oil for a number of reasons. JPMorgan Chase & Co. recently noted that U.S. President Joe Biden’s latest Strategic Petroleum Reserves (SPR) drain will see our southern neighbours exit 2022 with the “lowest oil reserves since July 1983”.

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Top sector pick for 2023

Let’s think about this for a moment: The United States is the largest consumer of fossil fuels in the world. If you are “Team Biden” and you want lower oil prices into the November mid-term elections, you drain the SPR now (because of more supply on the market, from the SPR). So…that’s what they have been doing for the past number of months – a myopic and politically driven energy policy.

But, again, if you are “Team Biden”, and you care about the 2024 presidential election, you must refill at least 30 per cent to 40 per cent of the SPR drain (according to The Bear Traps Report investment newsletter). This would need to occur after the mid-terms, and completed significantly before the presidential election. Thus, SPRs will be refilled after the mid-terms in November 2022 but well before Oct 2024! In other words, largely in 2023!

This, logically, suggests increased demand and rising energy prices during 2023. Refilling the SPRs will create significant demand. West Texas Intermediate (WTI) crude oil prices should rise. If you are Team Biden, you don’t want that at the cusp of the 2024 election! You want that Band-Aid ripped off and the pain over with well before the election! In other words, in 2023.

Adding to this reality is the rather poignant comment coming from Saudi Arabia after the Biden administration authorized the release of another 15 million barrels of crude from the U.S. Strategic Petroleum Reserve. Prince Abdulaziz bin Salman Al Saud, the Kingdom’s oil minister stated, “It is my profound duty to make it clear to the world that losing emergency stock may become painful in the months to come. Running out of capacity has a much dearer cost than what people can imagine.”

War in Ukraine exacerbates high oil environment

Next, a Bloomberg report on Ukraine war adds to my case for higher oil prices in 2023, stating, “(The) Ukraine conflict escalation seems closer…(it) could get much worse in a couple of months.”

It continues, “Russian President Vladimir Putin is pursuing his war aims in Ukraine with a ‘religious’ fervour and is unlikely to change course even as his eight-month invasion is beleaguered by setbacks, Estonia’s spy chief said.

“Mikk Marran, Estonia’s outgoing espionage chief, said that the Baltic nation’s intelligence indicated that the Russian president isn’t having second thoughts about the conflict, despite the lack of strategic accomplishments and a firmer line from an expanded NATO. ‘He’s still on a kind of a religious or a Messianic mission,’ Marran, 44, told a group of reporters in Tallinn (in late October).”

Finally, there’s the realization by liberal governments throughout the world that their lofty green policies were premature, short-sighted, and lacking any mathematical backings of supply-and-demand realities. The “new” green goals seem now to be for targets into 2050. Even that sounds pretty lofty. Whatever the case…Oil is going to remain dominant for years to come.

Commodities benefit from a weaker USD

As the U.S. Federal Reserve pulls back in their uber-hawkish stance (which I have been predicting though Investor’s Digest articles would happen), large outperformance will arise in hard assets on the back of a weaker U.S. dollar. You can learn more on this argument if you visit the ValueTrend website and watch my video for an argument for a weakening USD and rising gold going forward.

Of note: as the greenback has experienced the first signs of weakness, gold miners are now at three-week highs.

Meanwhile, gold is also taking some of the glory from tech stocks. After the recent technology stock earnings disappointments, the ratio is hitting new lows. I remain bullish on hard assets, including gold as we see a potential rotation of strength from high-growth sectors.

Keith Richards is Chief Portfolio Manager & President of ValueTrend Wealth Management. He can be contacted at info@valuetrend.ca.

This is an edited version of an article that was originally published for subscribers in the November 18, 2022, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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