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Not necessarily the dog days of summer given the S&P500’s 9% intramonth swing, but overall the S&P500 gained +2.4% during August, while the Nasdaq Composite added +0.7%. Energy indices lagged with Diversified Energy -2.2% (S&P 1500 Energy, S15ENRS) and subsector performance as follows: Midstream +0.3% (AMZ), Upstream -4.7% (XOP) Oilfield Services -11.5% (OIH) and Clean Energy gaining +1.0% (ICLN). During August, front month WTI fell -5.6% (~$73.55/bbl), while front month NYMEX natural gas rallied +4.5% (~$2.15/mmbtu).(1)
Sentiment on oil markets weakened during August. Several big Wall Street firms lowered their 2025 oil price forecasts on the combination of tepid demand (primarily China), recession risk (an ever-present threat for the past several years) and the return of OPEC supply (scheduled to start October 2024). These concerns are valid, resulting in an oil market that is somewhat binary over the next 18 months. Price will either be decent (WTI in the $70’s to low $80’s) or poor ($60’s or worse) with OPEC being the key swing variable.
We believe OPEC’s near-term plan is challenged. The world does not need the 300-500kbbls/day OPEC+ indicates it will return in the short term, much less the 3+mmbopd of overall spare capacity. If OPEC+ insists on raising its output, the market is likely to respond by taking WTI into the high $60’s as a signal of displeasure and the low $60’s (or worse) as the physical volumes actually return. A conundrum we think results in OPEC postponing or dramatically reducing the magnitude of returning barrels. With US capital spending restrained and production growth at modest levels, OPEC+ must accept either a demand-side waiting game or lower prices. We lean toward the former, but admit to paying much closer attention to all OPEC+ nuances.
Natural gas prices remain in the doldrums, where they could easily stay for the next year. Influencing factors include ample wellhead supply, the overhang of shut-in volumes and delayed well completions, LNG project timelines slipping to the right and new demand sources (AI data centers, etc) that will not be meaningful until 2026+. Permian gas at the Waha hub has intermittently traded at negative prices for many months given significant volumes of associated gas (gas produced from oil wells). The startup of the 2.5bcf/day Matterhorn Express pipeline from Waha to Katy, TX in Q3 should help Permian prices, but is likely to weaken prices at other Gulf Coast hubs. The secular story for natural gas as a global bridge fuel remains strong, but so does the ability of producers to supply that story.
The most notable energy deal of August occurred in the Midstream sector, as ONEOK purchased the General Partner and ~40% of the MLP units of EnLink Midstream from behemoth infrastructure private equity firm Global Infrastructure Partners. The deal represented a +13% premium to the prior closing price and will be followed by a buy-in of the remaining 60% of EnLink. The first rationale mentioned in the press release? “Establishes fully integrated Permian Basin platform at scale”. Twenty years into the shale era, the US shale business is making the transition from growth to steady-state exploitation. As we’ve said for the past two years….this will continue.
Energy stocks lagged the broader market in August (+2.4% S&P500 vs. -2.2%energy) as the economic scare early in the month (three-day S&P500 retrenchment of -6%) was quickly replaced by more bullish economic datapoints. From an investing perspective, energy must thread two needles. First, the economic outlook must be supportive enough to provide decent demand and therefore decent commodity prices and decent financial results for energy companies. Secondly, energy must compete for investor attention/allocation against the juggernaut of technology’s profits and secular growth story. With YTD performance of +10.5 % vs. the S&P 500’s+19.5%, energy’s needle-threading has been profitable but relatively unimpressive. Following Q2 earnings, the tech sector has not relinquished its stranglehold on investor attention. As such, while waiting for the sector’s day in the sun, energy investors must continue to search for differentiated, unique or compellingly cheap companies/stocks.
(1) Bloomberg
