Displaying items by tag: oil

During Q3, there was a net outflow of $1.4 billion from renewable energy funds. Overall, there has been a 23% drop to $65.4 billion in total assets in renewable energy funds from the end of Q2. 

Renewable energy companies have underperformed due to high rates and rising costs which are compressing margins. Given that many of these companies have high multiples, they are more sensitive to rising long-term rates which makes future projected cash flows less valuable.

While there was a burst of enthusiasm around the sector following the passage of the Inflation Reduction Act (IRA), many stocks in the sector are down between 30 and 50% since then. For instance, the iShares Clean Energy ETF (ICLN) is down 39% since the IRA’s passage in August of last year.

Some of the issues they’ve faced include project delays, long timelines for permits in addition to the headwind of higher material costs and interest rates. As a result, many high-profile projects in Europe have been delayed or canceled due to these constraints. Another contributing factor for outflows out of the sector is that artificial intelligence has become the new ‘hot’ growth theme in 2023 with the theme attracting significant flows.

Finsum: Renewable energy funds experienced major outflows in Q3 due to a variety of factors. 

Most analysts attribute the current strength in oil to production cuts and discipline exercised by OPEC countries in preparation for a global recession. However, demand has been resilient, contrary to expectations, even with a weak Chinese economy and rising recession risk in many parts of the world. 

According to Haitham Al Ghais, the secretary general of OPEC+, demand is expected to grow by 2.4 million barrels per day over the next couple of years. While many are encouraging the group to increase production in order to provide relief to consumers and temper inflationary pressures, Al Ghais is more concerned about the decline in CAPEX in the oil & gas sector. 

He believes this will lead to an unsustainably tight equilibrium that will be prone to supply shocks and potential shortages. He believes that many in the West are being naive about alternative energy given the world’s reliance on fossil fuels. 

In essence, Al Ghais sees a bigger crisis looming given that he sees oil demand continuing to grow steadily while investments in future production have declined due to poor returns in the past and concerns that alternative energy will displace oil & gas. This is laying the seeds for a future energy crisis in his opinion.

Finsum: OPEC’s secretary general Haitham Al Ghais shared his thoughts on energy, and why he’s especially concerned about the lack of investment in new production.

JPMorgan upgraded the global energy complex to an ‘overweight’ rating as it sees the possibilities of an energy ‘supercycle’ due to low levels of CAPEX over the past few years and near-term supply shocks. The bank believes that Brent crude oil prices could reach $150 by 2026. It sees upside for major energy producers and operators like Shell, Baker Hughes, and Exxon Mobil.

Oil prices have risen in the second-half of the year with WTI crude oil exceeding $90. This places strain on consumers, adds to inflationary pressures, and complicates chances of a Fed pivot. Oil prices have maintained their gains despite increasing concerns that a recession may be materializing given soft labor and consumption data.

The biggest driver of prices has been stronger than expected demand coupled with OPEC production cuts. It sees a tight supply/demand dynamic lingering over the intermediate-term which means increased susceptibility to geopolitical shocks. Based on current trends, the bank anticipates a 1.1 million barrel per day deficit in 2025 which could widen to 7.1 million barrels per day in 2030. 

Finsum: JPMorgan sees the possibility of an energy supercycle due to demand remaining resilient and supply concerns.

On a shorter timeframe, oil has been enjoying a nice rally as it’s up nearly 30% since late-June. It’s largely being driven by the same catalyst that is affecting the stock market and bond market - recession risk in 2023 and early 2024 is being priced out, at least in the United States. 

While the worst-case scenario for the economy has been taken off the table in the last couple of months, it’s also clear that the best-case scenario of a re-acceleration of growth is also unlikely given the spate of weaker than expected economic data released this week. The other major factor supporting prices is production cuts from OPEC+ countries who are looking to push prices higher. And, there are rumors that Russia and Saudi Arabia are expected to announce further cuts in the coming weeks. 

On the bearish side, the major development is the deluge of data showing that China’s economy is much weaker than expected. Some of the weak data points include a drop in exports, consumption, and a nascent crisis in its real estate market. China is the world’s second-largest consumer of crude oil so this has major implications for its supply/demand dynamic.

Overall, oil is in a similar place to stocks and bonds. Amid a mix of bullish and bearish factors, it’s tough to determine whether this is a resumption of its bull market or simply an oversold bounce. 

Finsum: Crude oil prices are up nearly 30% since late June. However, it’s tough to be confident about its long-term direction given the mix of bullish and bearish factors. 

One of the biggest long-term issues affecting the energy sector is the growth of electric vehicles. According to the IEA, 50% of new vehicles sold will be EVs by 2030 with EV sales completely displacing traditional internal combustion engines (ICE) by 2050. 

In Q2 of 2023, there was a new record in terms of sales in the US with nearly 300,000 EVs bought which comprises about 7% of the total sold. A big contributing factor is the Inflation Relief Act which offered subsidies for up to $7,500 for select EVs with many states offering additional subsidies.  

Of course, this has major implications for gasoline demand which is a major component of crude oil use. And, it’s one reason why many are betting that global oil demand is peaking and set to decline over the coming decades.

This narrative is even affecting the supply side as many producers are using excess cash flow to pay off debt, distribute dividends, and strengthen their balance sheet rather than invest in new production. However, if this narrative turns out to be preemptive or incorrect, then there is likely going to be major upside for the energy sector.

Finsum: EV sales hit new record highs in Q2 of 2023 in part due to subsidies from the Inflation Relief Act. Whether EV sales keep rising is a major storyline in the energy market.