Displaying items by tag: oil

Energy has been one of the best-performing sectors YTD with a 10% gain. Energy prices have moved higher due to increased geopolitical uncertainty and strong economic data. Looking ahead, LPL remains bullish on energy and recommends overweighting the sector.

It notes that valuations are quite attractive, especially with producers focusing on cash flow in recent years. In the post-pandemic period, free cash flow yields have averaged 8%, while this figure averaged 4% in the preceding decade. And producers have been using this cash to buy back shares, raise dividends, and pay off debt. 

From a technical perspective, LPL notes the relative strength as the sector has been making new, all-time highs for much of this year. Additionally, there has been strong breadth, indicating broad-based buying pressure. 

Another looming catalyst is that there has been some rotation out of the ‘Magnificent 7’ stocks into cheaper parts of the market, such as energy, financials, and small-caps. Growth stocks have led the market higher for most of the past year, but with valuations extended, there is an increased risk of a pullback or correction.

Finally, investing in energy provides some protection against inflation continuing to linger above the Fed’s desired level and rates remaining elevated as a consequence. Energy also tends to rally when long-term bonds weaken, providing a hedge for portfolios.

Finsum: Energy has outperformed to start the year. LPL remains bullish on the sector due to its attractive valuation, positive correlation with inflation, and relative strength.

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.

Traditional benchmarks like the S&P 500 might not be capturing the full picture when it comes to energy as an investment sector. A recent article pointed out that, while its representation in the S&P500 has shrunk from 15% in the 1970s to barely 4% today, energy's contribution to index earnings remains significant, estimated at 10%. This raises a crucial question for financial advisors: are passive index funds providing sufficient exposure to this dynamic and evolving sector?

While global energy needs are undoubtedly set to rise, the energy landscape has vastly transformed since the oil-centric days of the past. Today's opportunities extend beyond traditional producers, encompassing a diverse spectrum of service providers, storage solutions, refiners, and transportation players.

Furthermore, the energy mix itself is undergoing a paradigm shift. The integration of sustainable alternatives alongside established methods creates a landscape rife with investment potential.

For advisors seeking to capitalize on this opportunity, a deep understanding of available energy fund options is paramount. By moving beyond traditional benchmarks and embracing the sector's multifaceted nature, advisors can unlock a wider range of potential returns for their clients while navigating the exciting transformation of the energy world.

Finsum: Do passive indexes fully capture the investment opportunity today’s energy sector presents?

Lower prices for crude oil and natural gas will lead to a more than 30% decline in earnings for the energy sector in Q4. In contrast, the S&P 500 is expected to see a 1.4% drop in earnings. However, these numbers are somewhat skewed by the 7 largest, mega cap tech stocks which have seen a 53.7% increase in earnings. Subtracting these stocks from the S&P 500 reveals earnings decline of 10.5% for the index.

Overall, energy will see the biggest decline in earnings among all sectors. The weakness was recently highlighted by top-line misses for Exxon Mobil and Chevron. The biggest losses are expected in Oil & Gas Refining and Marketing with a 63% contraction in earnings, followed by Integrated Oil & Gas at -34%, and Oil & Gas Exploration & Production with a 20% drop. On the other side, Oil & Gas Equipment & Services and Oil & gas Storage & Transportation, both saw earnings growth.

Many producers are dealing with a bearish outlook for oil and gas prices due to weaker demand from Europe and China despite elevated geopolitical risks. At the same time, these producers are dealing with higher costs due to inflation, creating incentives to increase revenue by adding production. 

Finsum: As Q4 earnings season enters its later stages, it’s clear that the energy sector will see the biggest decline in earnings. Here are some of the major factors behind the drop.