Displaying items by tag: energy

A noteworthy development in 2024 has been soaring uranium prices. The radioactive metal was up more than 90% in 2023 and is now at its highest levels since 2007. According to Ole Hansen, the head of commodity strategy at Saxo Bank, this move is being driven by increased demand from ETFs holding physical inventory and utilities who were not hedging due to years of low prices. 

Prices moved past $100 per pound last week following an announcement from Kazakhstan's state uranium company that it may fail to meet production goals due to construction delays and difficulty sourcing raw materials. This follows a slew of production downgrades from a variety of producers in 2023, adding to pressure on the supply side. 

On the demand side, analysts point to the Sprott Physical Uranium Trust and Yellow Cake as marginal sources of gold demand, contributing to the ‘squeeze’. As a result, many now expect uranium to exceed all-time highs from June 2007 of $136 per pound, and uranium miner equities have also been following the metal higher. 

Longer-term, many believe that the uranium market is at a deficit given the gap between yearly production and consumption. Currently, the gap has been made up by huge amounts of secondary supply, yet this inventory is also rapidly being depleted.  

Finsum: Uranium prices have continued momentum from last year. Many believe new, all-time highs are in store given increased demand from ETFs and utilities, while production is impaired.

Two of the largest domestic natural gas producers and leaders in shale production, Chesapeake Energy and Southwestern Energy, have agreed to merge in a $7.4 billion deal. This continues a wave of M&A activity in the energy sector. For 2024, this is expected to continue given that many companies are flush with cash, while valuations are also attractive.

The merger is an all-stock transaction and is expected to close in the second quarter. According to Chesapeake CEO Nick Dell’Osso, the merger will enable them to compete on an international scale and lead to lower costs. The new, combined company will have a new name and a market cap of around $24 billion. It forecasts 15 years of inventory and expects a 20% increase in dividends due to “significant synergies” and an increase in free cash flow generation over the next 5 years. 

Last year, there were a handful of deals in the sector as ExxonMobil bought Pioneer Natural Resources for $60 billion, while Chevron bought Hess for $53 billion. Both companies were looking to boost production capacity. In 2024, analysts are forecasting that major energy producers will be looking to acquire high-quality shale holdings in public and private markets.

Finsum: Chesapeake Energy and Southwestern Energy agreed to a $7.4 billion merger. Analysts are expecting more M&A activity in the sector in the coming year.

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. 

This year has seen some big swings in crude oil prices given a variety of developments. These include rising US oil production, OPEC production cuts, the ongoing war in Ukraine, rising tensions in the MIddle East following Hamas’ attack, and a slowing global economy. As a result, crude oil prices ended the year down 10%. 

Entering 2024, these will continue to be major themes that need to be monitored. At its last meeting, OPEC reduced its production by 2.2 million barrels per day and said that more cuts may be necessary to support the price. But, there is increasing skepticism whether countries will actually abide given that many are reliant on oil revenue. 

Another challenge for OPEC is that US oil production continues to rise. Next year, it’s forecast to be 13.3 million barrels per day, an increase from this year’s average of 13 million barrels per day. Companies like Exxon Mobil and Chevron recently made major acquisitions of domestic producers and are also increasing capital expenditures. Unlike smaller producers, these majors are able to take advantage of economies of scale to push their costs lower and remain profitable with lower prices. 

OPEC now only has control of 51% of the crude oil market which is the lowest in decades. This raises the possibility that Saudi Arabia could choose to increase the supply to temporarily crash the price of oil in order to punish these producers and take back market share, although most analysts believe this is unlikely. 

On the other side, demand is projected to grow at the smallest rate in a year - 1.3 million barrels per day. In 2023, oil demand increased by 1.8 million barrels per day.  In part, this is due to a slowing global economy especially in China. 

Finsum: Oil has been quite weak to end the year despite several bullish catalysts. In hindsight, the most important development has been rising US oil production which is expected to hit a new record next year. 

Energy stocks underperformed in 2023 due to supply being stronger than expected, while demand was muted due to softer economic growth in Asia and Europe. For next year, Maurice FitzMaurice, Fidelity’s energy sector portfolio manager, is bullish on the sector as he sees oil prices remaining high. Additionally, he expects increased investments in international and offshore production. 

While many are focused on the recent decline in oil prices, FitzMaurice believes that fundamentals support higher prices, and he points to low levels of CAPEX over the past decade as a major factor. Even though investment in production has recently increased, it will take years for it to come online and meaningfully impact supply. He predicts that US shale production will see slower growth due to higher costs and less productive wells, and OPEC will remain vigilant to support prices. 

In terms of subsectors, he favors energy equipment and services companies. He believes that more investment is required to meet the world’s need for oil, and higher levels of CAPEX should persist for multiple years especially given nearly a decade of underinvestment. Additionally, there is limited capacity in these subsectors which should result in significant pricing power and higher margins. In terms of which companies to target, he advises seeking out companies trading at discounted valuations, a healthy balance sheet, and a disciplined approach to capital allocation that has some sort of competitive advantage. 

Finsum: Fidelity’s energy sector portfolio manager shared his outlook for the sector next year. He is most bullish on energy services and equipment stocks due to the start of a multiyear investment cycle.