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Key Points
- The Woodside share price and the ASX 200 energy sector have underperformed over the past year
- ASX investors may be underestimating the strength in the oil price that will be driven by forecast global economic growth
- Ausbil fund manager Luke Smith thinks we could see an "explosive performance from energy equities in 2022"
Don't write off fossil fuel investments yet, as the oil price and ASX energy shares may be poised to rally this year, according to a leading fund manager.
Ausbil's Global Resources Fund co-portfolio manager, Luke Smith, believes positive global economic growth will drive underlying demand for oil for the next few years, according to a report in the Australian Financial Review.
That is great news for ASX 200 energy shares, which have been underperforming the broader market.
ASX energy shares on the nose
The Woodside Petroleum Limited (ASX: WPL) share price lost about 7% over the past year. Santos Ltd (ASX: STO) shares shed a similar amount, while Beach Energy Ltd (ASX: BPT) shares crashed by nearly 30%.
In contrast, the S&P/ASX 200 Index (ASX: XJO) gained around 10% over the same period.
But the share prices of Woodside and its peers could soon see a reversal of fortunes.
Is the Woodside share price primed for recovery in 2022?
"We expect oil prices to continue to strengthen towards in excess of $US100 per barrel in the near term," Smith told the AFR.
"We would not be surprised if the commodity traded through $US200 in the next couple of years."
ASX energy shares failing to fire up
The Brent oil price is currently fetching around US$85 a barrel and is up around 50% over the past year. This stands at odds with the poor performance of ASX energy shares. This valuation gap is quite unique to Australia. Smith points out that the US oil and gas sector, which includes explorers and producers, soared by over 80% in 2021.
Potential tailwinds for the Woodside share price
"Unfortunately, for Australian investors, the ASX large-cap energy sector has performed with some ambivalence to the prevailing strength in the commodity," Smith said.
"The combination of underweight positioning towards the Australian energy sector, our expectations regarding the outlook for both strengthening earnings, and unchallenged valuations supports our view that we could see an explosive performance from energy equities in 2022."
Foolish takeaway
The global transition to a net-zero carbon future has put Woodside and other ASX energy shares in the sin bin. But investors can't count on the energy transition being a smooth one. So it may be too early to write off fossil fuel-linked ASX shares. Just don't tell ESG investors.
