Crude Awakening: A Forecast for Energy Sector Trends in 2024

Forecast for Energy Sector Trends in 2024
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Summary

Great news! The market is looking optimistic thanks to limited supply, strong demand, and increasing investments in production.

Key takeaways

  • In 2024, we can expect oil prices to remain high due to limited supply, increased geopolitical risks, and rising demand. This will likely lead to improved profitability for companies in the oil and gas industry.
  • We are likely witnessing the beginning of a substantial investment phase in offshore and international manufacturing, which has not been fully recognized by investors yet.
  • Companies in the energy equipment and services sector, that supply crucial equipment and services required for oil and gas production, could potentially reap benefits from the current investment cycle.

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Although the energy sector experienced a sluggish performance in 2023, the outlook for 2024 appears promising. This is due to the sustained high prices of oil and increasing investments in energy production. As a result, oil producers and energy equipment and services firms are expected to reap substantial benefits.

The outlook for crude oil prices in 2024 remains bullish, with a combination of factors driving upward pressure on prices. These include a constrained supply chain, heightened geopolitical risks, and an anticipated increase in global energy demand.

These favorable conditions indicate a potential for increased profitability and stock prices within the energy industry. Additionally, a surge in international and offshore investments has contributed to an advantageous climate for energy equipment and services firms.

An Overview of Energy Stocks in 2023: Momentary Slowdown Observed

After leading the market by an enormous margin in 2022, when energy was the top-performing sector, these stocks have pulled back. The sector had lost 6.7% as of mid-December, compared with the nearly 20% gain for the S&P 500®.

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Past performance is no guarantee of future results. Energy sector performance is represented by the S&P Energy Select Sector Index. Data as of December 8, 2023.
Source: S&P Dow Jones Indices, a division of S&P Global.

During 2023, investors preferred high-growth sectors such as technology stocks due to the perception that these sectors would benefit from the slowdown in inflation and interest-rate hikes. However, this shift in investor preference has also caused a slower performance in other sectors. Additionally, fears of an economic slowdown have put pressure on commodity prices and energy demand.

Oil Prices Could Remain High

The energy sector is showing promising signs for investors, thanks to the potential for sustained high prices for oil. In particular, Brent crude oil, which is a light crude oil extracted from North Sea oilfields, began the year at $77 per barrel, peaked at $94 in late September, and has since settled at around $75 per barrel as of mid-December. At these levels, most oil and gas companies can generate significant profits.

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Past performance is no guarantee of future results. Brent crude is a light, sweet, crude oil sourced from the North Sea that serves as a major global benchmark for oil prices. WTI refers to West Texas Intermediate crude, a light, sweet, crude oil sourced from certain US oilfields, that serves as a major US and global benchmark for oil prices. Data as of December 8, 2023. Source: FactSet.

The current supply outlook for oil is being affected by various factors, leading to continued price support. Global investment in oil production has been persistently low for almost ten years. Even though investments have started to rise, the new supply will take a few years to materialize.

Shale oil production in the United States may experience a deceleration in its growth rate in the future due to the increasing costs of production and the aging of shale-producing areas.

OPEC, a leading oil-producing countries’ cartel, is tightly controlling oil supplies by reducing output through 2024. Saudi Arabia and Russia have voluntarily cut production further than what was agreed upon by the cartel.

OPEC is aiming to maintain per-barrel oil prices in the $80 to $100 range, which is regarded as the sweet spot that generates strong profitability for oil producers without negatively impacting oil demand. Elevated geopolitical risk is another contributing factor, with two significant wars currently taking place that could pose a threat to global oil supplies.

Current global oil demand is stable and expected to witness growth in 2024, primarily due to the revival of China’s economy and the expansion of India and other developing economies. Looking ahead, the economic progress in developing markets is likely to drive further hikes in oil demand. This potential scenario of increasing demand and limited supply may continue to sustain energy prices.

Energy Equipment and Services Stocks to Watch

As we look at the sector, we can observe that energy equipment and services firms could potentially have a strong position in the market by the year 2024. These companies are responsible for providing essential equipment and services required to extract oil and gas, such as crews, drilling rigs, and advanced technologies. I think that this sector could benefit from several years of growing investments, which are necessary to support the increasing demand for oil and gas. Moreover, many investors may have underestimated the level of investment that will be necessary to meet the world’s soaring demand for energy commodities.

There has been a prolonged trend of low investment in new oil and gas production, particularly in international and offshore markets. However, this trend is now reversing and we are witnessing an increase in new production. It’s important to note that new production can take a considerable amount of time to ramp up, which means it could take a few years for international and offshore spending to recover. At present, the industry is still in the early stages of a significant investment cycle in international and offshore production. Corporate spending has been on the rise and is expected to continue growing.

As oil producers aim to increase their production, they tend to spend more on energy equipment and services. Additionally, oilfield services companies may hold an advantage in terms of strong pricing power, as there is limited capacity in several industry subsectors. The oilfield services industry is recognized for its high incremental profit margins, implying that when demand and pricing are robust, profits can potentially rise quickly.

Fund top holdings

Top-10 holdings of the Fidelity® Select Energy Portfolio (FSENX) as of October 31, 2023:

  • 23.7% – Exxon Mobil Corp. (XOM)
  • 5.4% – Cenovus Energy Inc. (CVE)
  • 5.2% – Canadian Natural Resources Ltd. (CNQ)
  • 5.1% – Chevron Corp. (CVX)
  • 4.8% – Occidental Petroleum Corp. (OXY)
  • 4.6% – SLB (SLB)
  • 4.3% – Marathon Petroleum Corp. (MPC)
  • 4.2% – Halliburton Co. (HAL)
  • 3.7% – ConocoPhillips (COP)
  • 3.6% – Valero Energy Corp. (VLO)

(See the most recent fund information.)

In conclusion, the energy sector’s outlook for 2024 appears promising, with sustained high oil prices and increased investments driving a positive trajectory. Despite a temporary slowdown in 2023, the potential for improved profitability in oil and gas companies, coupled with a surge in international and offshore manufacturing, positions the industry for a robust comeback. Energy equipment and services firms, often overlooked by investors, stand to benefit from this favorable landscape. In essence, the stage is set for a resurgence in the energy sector, making it an enticing prospect for investors in the upcoming year.

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