Displaying items by tag: OPEC

U.S. crude oil futures dropped to around $73 per barrel amid widespread concerns of a looming recession. West Texas Intermediate (WTI) crude oil, now up less than 2% for the year, and Brent crude, slightly down for 2024, saw declines despite earlier gains fueled by Middle East tensions and anticipated market tightening. WTI reached six-month lows earlier in the session. 

The energy prices for the day showed WTI at $72.84 per barrel and Brent at $76.30 per barrel. The downturn followed disappointing U.S. job growth and continued manufacturing sector contraction. 

Adding to the market's unease, China's weaker imports and refinery utilization rates have also impacted sentiment. OPEC+ might reconsider increasing production in October, with potential cuts depending on market conditions. Geopolitical risks persist, notably with rising tensions between Israel and Iran.

Finsum: Weak demand is very common leading into recessions, but with rate cuts around the corner now might be the time to buy energy stocks.

Crude oil futures climbed on Thursday, buoyed by easing inflation data. The consumer price index dropped 0.1% in June, reducing the annual rate to 3%, which raised hopes for Federal Reserve interest rate cuts in September. 

Lower interest rates typically boost economic growth, potentially increasing oil demand. Meanwhile, mixed signals on global oil demand emerged, with the International Energy Agency forecasting slower growth compared to OPEC's more optimistic outlook. 

West Texas Intermediate and Brent crude both saw price increases, while natural gas prices fell. Overall, the oil future looks fairly positive with potential increased demand. 

Finsum: It is potentially shaping up to be a strong fall for energy prices if we see a rate hike.

The Energy Select SPDR ETF (XLE) is up 14% YTD, which is the second-best performance among sectors. This follows a year of underperformance in 2023 due to concerns of a recession impacting energy demand, while strong US production offsets the impacts of OPEC cuts. Last month, OPEC announced that production cuts of 2.2 million barrels per day would continue in the second quarter.

This year, oil prices have risen due to increased tensions in the Middle East. Additionally, recent economic data has clarified that the US economy is not near a recession, and there are some indications of a pick-up in economic growth. The near-term macro picture looks bullish for energy stocks given increased demand, tighter supply, and intensifying geopolitical tensions. On the supply side, OPEC has demonstrated discipline in terms of members abiding by agreed-upon production cuts, and US production is expected to not increase further.

Given valuation concerns about many parts of the market, energy stocks are also cheap, trading at 13 times expected earnings vs. 21 for the S&P 500. XLE also pays a 3% yield, which is more than double the S&P 500’s yield of 1.4%. Further, historical research shows that energy stocks have posted the best performance in high-rate environments, which is likely to persist for longer given recent economic data. 

Finsum: Energy stocks have had a strong start to 2024. Recent economic data is supportive of increased demand, while the supply side is being impacted by OPEC cuts and heightened geopolitical tensions. 

Oil prices have continued to defy Wall Street analysts. Last year, the consensus view was that prices would weaken as the US economy slipped into a recession, with the rest of the world facing a sharper contraction in economic growth. While growth did slow, the US economy continued to expand, and global oil demand increased more than expected. In Q1, the IEA upped its forecast for US oil demand by 110,000 barrels per day due to stronger than expected economic data. 

Additionally, despite predictions from EV boosters, there has been no material impact on oil demand from increased adoption. Similarly, China’s economy has been mired in a slump, yet Chinese oil demand also defied expectations and increased more than expected. In fact, a major lesson of the post-pandemic period is the inelasticity of oil demand. 

On the supply side, US production also surpassed forecasts and made up for any production cuts from OPEC. A major factor is increasing well productivity due to newer drilling techniques. 

Looking ahead, many were skeptical that OPEC+ would remain disciplined, given individual countries’ incentives to increase revenues by boosting production. So far, the cartel has managed to successfully reduce production, which is contributing to the current tight market and a major factor in oil’s upward move YTD. 

Finsum: Last year, many analysts got it wrong when it came to oil. Overall, they were too bearish on the economy and overestimated how much a weak economy would impact oil demand. 

Last year, US oil production increased by 1.8 million barrels per day according to the Department of Energy. It’s a major reason why oil prices are under $80 per barrel despite an assortment of reasons for it to be higher including OPEC production cuts, the ongoing war between Russia and Ukraine, and the conflict between Israel and Palestine. 

However, forecasts are showing that US production is expected to grow by a much smaller amount in 2024 due to inflationary pressures, consolidation, and a slowdown in rig activity. With a higher cost of production, less projects are viable, especially with oil prices at current levels.

So far, most of the reduction in drilling is expected to come from smaller, private producers, while larger, public producers are expected to continue with plans to increase production by an estimated 270,000 barrels per day. Yet, this is also less than last year’s increase of 900,000 barrels per day. However, forecasts indicate more robust growth in 2025 with new projects coming online. 

At the moment, US producers have the capacity to increase production in the event that prices rise more than expected and also cut if prices fall further. At the moment, the market seems to be near equilibrium as demand growth is expected to be slow in 2024 due to weakness in Europe and Asia. 

Finsum: Strong US production is one of the major reasons that oil prices are under $80 per barrel. However, production growth is expected to slow in 2024 before picking up once again in 2025.