Aussie oil's rough 2024

15/12/2024 21:20:00

Brent crude climbed 1.6% on Friday, to mark a a three-week high, but the bigger picture is gloomier.

Brent crude and West Texas Intermediate (WTI) have generally traded within a $6 range since September, reflecting an uneasy balance between short-term supply constraints and medium-term oversupply risks. However, year to date, Brent is down 1.49%

Here's a look at some numbers from 2024 and some recent news.

Oil's decline

Brent crude reached US$119.02 on 6 June 2022, partly on the back of Russia's invasion of Ukraine. But it's been a downward trend since then. Currently, Brent crude is US$74.49 per barrel.

In hindsight, BHP's divestiture of its petroleum portfolio on 1 June 2022 looks like excellent timing.

A five-year chart:



Source: Trading Economics

The main factor driving the drop is increased supply. In its December report, the International Energy Agency (IEA) predicted a consumption of 103.9 mb/d in 2025, but a supply of 104.8 mb/d "even in the absence of unwinding of OPEC+ cuts". That's a surplus of 900,000 barrels per day.

A secondary factor is the movement away from fossil fuels to electric vehicles and renewable energy. But, according to the IEA, EVs only made up around 18% of total car sales in 2023. The full displacement of "ICE" (internal combustion engine) vehicles is thought to be decades away, especially in developing economies, due to affordability and charging infrastructure challenges. Sales of electric remain concentrated in just a few markets (China, Europe and the US were 95% of global electric car sales in 2024).

XEJ's rough 2024

Australian energy stocks have been hit hard by the declining oil price.

• The S&P/ASX 200 Energy index is down 21.31% year to date.
• BetaShares Australian Resources Sector ETF (ASX:QRE) is down 14.06% year to date.
• Woodside Energy Group (ASX:WDS) is down 24.04%.
• Santos (ASX:STO) is down 15.49%.
• Beach Energy (ASX:BPT) is down 16.56%.

Bucking the trend, Origin Energy (ASX:ORG) is up 22.9%. This may be due to financial performance and the company's diversification into renewables. Origin reported strong revenue increases in half-yearly and yearly results.

International oil companies have performed better.

• BetaShares Crude Oil Index ETF (ASX:OOO) is up 2.27% year to date. This fund tracks the S&P GSCI Crude Oil Index Excess Return.
• BetaShares Global Energy Companies ETF (ASX:FUEL) is up 2.73%. This ETF invests in companies like Chevron, Exxon Mobil and Shell.

Majors like ExxonMobil and Chevron have more diversified portfolios than their Aussie counterparts, making them more resilient to oil price changes. They invest in low-carbon projects as well as downstream operations like refining and petrochemicals.

Weekly push and pull

Some forces pushing oil up:

• Sanction talk. There are reports that the Biden administration is considering new sanctions on Russia and also on Iran (in response to its nuclear development program). Meanwhile the European Union has backed its 15th sanctions package on Russia, and the G7 has targeted Russia’s “shadow” fleet of crude carriers, a fleet used to transport sanctioned oil covertly.
• Middle East politics. While Syria is not a major oil producer, the power vacuum in the wake of the fall of the Assad regime in Syria on 8 December has raised fears of increased instability.
• OPEC+ production strategy. On 9 December, OPEC+ decided to delay increasing production quotas until at least March 2025. 
• Lower US inventories, short term tight supply. On 11 December, EIA's weekly report showed that US stockpiles at Cushing, Oklahoma (the primary delivery and storage hub for WTI crude oil futures contracts) plunged to just 22.9 million barrels, the lowest level since 2007. This decline follows from the previous week, indicating stronger-than-expected domestic demand.
• China's stimulus pledges. The Chinese government plans to increase fiscal stimulus in 2025, including via rate cuts. China is the world’s largest oil importer.

Some forces pushing it down:

• Supply glut concerns. As mentioned, on 12 December, the IEA forecast an oversupply of 950,000 barrels per day in 2025, which could increase to 1.4 mb/d if OPEC+ unwinds its voluntary production cuts earlier than expected. 
• Non-OPEC supply growth. The United States, Brazil, Guyana, Argentina, and Canada are expected to collectively add more than 1.1 mb/d of crude oil and natural gas liquids in 2025. Kazakhstan’s Tengiz expansion is set to boost output by 260,000 barrels per day, and Saudi Aramco’s Jafurah gas project will increase Saudi Arabia's natural gas liquids production.
• Demand uncertainty. In its monthly report on 11 December, OPEC revised its forecast for oil demand growth in 2024 and 2025, downgrading the outlook for both years. Demand is now expected to grow by 1.1 mb/d in 2025, reflecting slower-than-expected growth in key non-OECD economies, like Nigeria, Indonesia and South Africa. China has seen its oil consumption growth slow sharply. Imports declined 4% in November from the previous month. Within OECD countries, the US remains a bright spot for oil demand, but Europe and Asia-Pacific show signs of stagnation.
• Quota compliance. Some OPEC+ members are exceeding production quotas. Iraq, Kazakhstan and the United Arab Emirates have been past offenders. OPEC can use diplomatic pressure, but has no legal authority for enforcing quotas.

Disclaimer

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