Displaying items by tag: OPEC

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. 

Ever since the end of the pandemic, oil demand has seen strong growth and reached new highs. Last year, oil demand increased by 2.3 million barrels per day. According to Bank of America, demand should increase by 600,000 barrels per day on an average annual basis over the next decade. 

Increased demand from emerging markets in Asia and Europe is enough to offset lower demand in developed economies. Over the longer-term, increased use of electric vehicles, more investments in energy efficiency, and greater share of energy production from renewables will impact oil demand. However, there’s still a vigorous debate about the extent and timing.

The International Energy Agency (IEA) sees demand for fossil fuel peaking before the end of the decade. OPEC has strongly disagreed with this prediction and believes that it can be dangerous if it discourages investments in new production especially since oil demand has been so robust following the pandemic despite many skeptics. 

OPEC Secretary General Haitham Al Ghais remarked that “Given these growth trends, it is a challenge to see peak oil demand by the end of the decade, a mere six years away.” He also added that there have been numerous predictions about oil demand peaking in the past which turned out to be incorrect.

Finsum: Oil demand continues to rebound and hit new highs in 2023 at 102.9 million barrels per day. It’s forecast to keep growing over the next few years, although there is a vigorous debate about when it will peak.

2024 has started off with a bearish tone for the energy sector amid concerns of a supply glut and weakening demand. On Monday, crude oil prices dropped 4% as Saudi Arabia reduced prices for Asian customers by $2 per barrel. 

This is leading to speculation that Saudi Arabia could be looking to regain market share by punishing US producers and undercut cheaper Iranian and Russian oil. It could lead to a similar situation as 2020 when oil prices collapsed as Saudi Arabia flooded the market to punish other producers. Currently, the US is producing 13.2 million barrels per day of oil and has been restocking inventories and increasing exports. Others see it more as the consequence of a weak demand environment and a reflection of a decelerating economy. 

Energy prices had been higher to start the year amid an increase in geopolitical tensions. These include Houthi rebels attacking commercial vessels in the Red Sea and the escalations in the war between Israel and Hamas which could turn it into a larger, regional war. However, these concerns are being dwarfed by the supply and demand picture as evidenced by West Texas crude oil at $70 per barrel. 

Finsum: Oil prices dropped as Saudi Arabia announced that it would be reducing prices for Asian customers. Some believe that the country could be acting to protect market share.