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Up, down and all around. Energy indices were generally stronger in July with Diversified Energy +2.1% (S&P 1500 Energy, S15ENRS) and subsector performance as follows: Oilfield Services +6.7% (OIH), Midstream +0.6% (AMZ), Upstream +0.6% (XOP) and Clean Energy with a nice bounceback performance at +6.2% (ICLN). During July, front month WTI fell −4.5% (~$77.90/bbl), while front month NYMEX natural gas hit an air pocket and closed the month −21.7% (~$2.05/mmbtu).(1)
Oil market complexity took a step function higher during July and early August. Although not at red-alert levels, downside risks are probably the highest they’ve been YTD. The Chinese economy continues to look lackluster, as does Chinese oil demand. The US Presidential race saw a Biden exit, a Harris entrance and a Trump assassination attempt. The Middle East crisis has potentially escalated as Israel killed a Hamas official on Iranian soil. The Japanese carry trade unwound and US economic datapoints briefly signaled a Hard Landing, spurring a pseudo-flash crash in stock markets while taking oil to ~$73/bbl. This was followed quickly by datapoints that were more bullish, catalyzing a violent upside recovery in financial markets and oil trading back to the high $70’s. And let’s not forget OPEC+ reiterating its desire to bring shut-in barrels back to the market in Q4 2024.
Of these items, the most significant downside risk is the health of the US economy (and global economy by default). Right now, we expect a relatively balanced 2024 and 2025 oil market. 2024 should see supply and demand roughly balanced at +1-1.5 mmbopd. 2025 looks similar. IF the economy turns from Soft Landing to Hard Landing, oil demand will erode more quickly than oil supply, dragging price lower. OPEC+ has limited appetite for further cuts and organic supply growth from Brazil and Guyana has along-lead nature with a limited reaction function. In a Hard Landing world, US drilling would slow further and production would eventually follow, but not in time to protect oil price from a nasty dip. Should we be scared of the economy? Yes. But we’ve been scared of the economy for 2+ years and a Wall of Worry has been climbed. Baking in all the variables (some of which are further discussed below), at this point we have no change to our $80/bbl price forecast through 2027, although we admit to being more nervous. Also, no change to our $70-$85/bbl WTI price range for 2024. We’ll stay vigilant.
An encouraging datapoint from Exxon’s Q2 2024 earnings discussion – via CEO Darren Woods: “Later this month, we'll publish our global outlook, which projects global energy demand at 15% higher in 2050 than it is today. We see oil demand holding steady at around 100 million barrels per day in 2050, while demand for renewables and natural gas grows considerably.” Our observation – there is a LOT of money to be made in the oil and gas business over the next 25 years…and the next 50 years.
Our natural gas outlook remains unchanged – fundamentally sloppy for the next year, then tightening into late 2025 as LNG exports boost demand. July and early August saw US courts send three Gulf Coast LNG projects back for further FERC reviews, likely slipping the timing of these 2027/2028 projects by at least 3-6 months. From both a regulatory and operational perspective, getting these monster projects across the finish line isn’t easy. Timelines almost never move faster than expected.
As the US election approaches, more and more people are playing the “what if” game around the energy policy of the next President. Simply put, we see Trump as better for industry, but riskier for commodity prices while Harris will be tougher on industry, creating a more favorable backdrop for commodity prices.
- If elected, Trump will probably roll back some of the IRA clean energy incentives, lengthening the runway for fossil fuels. He’s also likely to be less onerous on regulations and resource access, while potentially being tougher on Iran. Russia/Ukraine policy is a wildcard. Accompanying Trump’s more favorable approach to the industry is the “drill, baby, drill” mentality which could increase supply to the detriment of prices. We’d also expect a Trump administration to be more receptive to continued energy consolidation.
- Harris feels like more of a status quo situation. Tougher rules, regulations and taxes/costs for fossil fuel companies and significant scrutiny on mergers, while supporting green initiatives that shorten the fossil fuel runway. On the margin, this discourages hydrocarbon supply and is supportive of commodity prices.
While the occupant of the White House certainly matters, we aren’t making any portfolio adjustments based on potential political outcomes.
The Year of The Deal had a busy July. In the E&P sector, Devon Energy bought private Bakken operator Grayson Mills for $5B, Vital Energy and partner Northern Oil & Gas did a $1.1B Permian deal with private Point Energy and Permian Resources tacked on $820MM of Delaware Basin assets from Occidental. In Oilfield Services, Helmerich & Payne expanded internationally with the ~$2B purchase of private driller KCA Deutag, while Archrock paid ~$1B for private compression player Total Operations and Production Services. Deals like the ones mentioned will keep happening until the four drivers of consolidation (inventory, size, scale and value) are no longer present. For now, they are.
Perhaps garnering the most deal-related attention were two transactions that didn’t happen. Ecopetrol opted not to exercise its right to buy into 30% of Occidental’s Crown Rock acquisition. Crown Rock was/is a great Permian asset, but Ecopetrol is validating our view that the deal was fully priced. Meanwhile, Exxon notched another win in the battle over the Hess Guyana asset. Arbitration with Chevron was set for May 2025, delaying the Chevron + Hess merger and creating even more angst for everyone except Exxon. Guyana is the single best oil discovery in the world over the past 15 years. Chevron and Exxon are certainly illustrating that marquee assets are worth fighting for.
(1) Bloomberg
