Despite recent volatility and concerns about escalating war in the Middle East, stocks are off to a strong start to the year after the boom I predicted in December. More pleasant surprises await.
The big one is energy stocks, whose recent outperformance should continue to be strong into the second half of 2024. The sector’s rally is not a head fake from OPEC+ production cuts or a temporary war spike. It’s real. Let me explain why.
After a strong energy market in 2022 on the back of soaring oil prices due to President Putin’s invasion of Ukraine, most prognosticators are predicting that Russian aggression, OPEC+ supply constraints, and a post-COVID-19 China I was imagining a 1970s-like supply shortage caused by re-acceleration. Presumably, if that happens, oil prices will rise again, and power and energy stocks will also soar.
Instead, 2023 humiliated energy bulls. Globally, the sector rose only 2.5%, while global stock prices soared 23.8%. S&P 500 Energy Stocks fell -1.3%, while the S&P posted an impressive gain of 26.3%.
why? Oil prices had plummeted from nosebleed highs in 2022. Global production is expected to continue rising in Norway, Guyana and North America, dispelling concerns about supply shortages. Biden’s temporary ban on new federal land leases went nowhere. As the world’s largest producer, U.S. production reached a record high.
Therefore, oil prices range from about $70 to $95, hurting energy companies whose profits roughly parallel oil prices.
Now, energy bears are repeating that mistake, this time reversing the 2023 delay and extrapolating it to 2024. They deny a new rally in energy, arguing that OPEC+ production cuts, as well as Ukraine and the Middle East war, are only causing a “temporary” rise. Fund flows, money manager research, and valuations all indicate that investors are reducing their energy holdings.
Nevertheless, oil prices will remain strong in 2024, fueling energy company profits and oil and gas inventories becoming a major wall of concern.
This is not due to OPEC+’s continued production cuts. They are now merely symbolic because they were baked in by stock prices and oil prices long ago. The same goes for regional wars, which are widely monitored despite recent turmoil. Biden also can’t take credit for suspending permits for new LNG export terminals, which are now facing pushback in Texas, Louisiana and more than a dozen other states. .
Rather, it’s a simple story of incentives. After the invasion of Ukraine, energy companies faced soaring prices and increased production. Biden’s LNG “pause,” even if it lasts beyond November, won’t completely stop terminals already permitted and under construction from adequately supplying the world.
At the same time, U.S. producers are completing wells much faster than they can drill new ones. U.S. “frac logs” of drilled but uncompleted wells are down 17.5% from a year ago.
This means less inventory is coming online quickly, and better-positioned producers aren’t replacing it. After years of consolidation, global mega-drilling companies have assumed a dominant position. Smart production targets from major companies have reduced the number of rigs in the U.S. from 621 at the end of 2022 to 506 today. Drilled wells decreased by 16.2% from the previous year. Production will lag approximately six months behind the well drilling. It will quickly slow down significantly.
Meanwhile, pessimistic analysts underestimate global oil demand and overemphasize weaknesses in economies such as Germany and China. However, strong GDP growth in the US, a stronger than feared eurozone economy and stable consumption in China suggest oil demand is stronger than expected.
All of the above, as you might expect, will cause oil prices to rise significantly and we expect them to break through to their 2023 highs. Add cost discipline to this and you should see a bumper crop of energy revenues. Big oil companies in the US and UK should benefit most. The company’s stronger balance sheet, lower cost of production, and integrated business model keep oil prices from rising, but allow it to maximize profits when prices do.
But you might think, Higher oil prices mean higher gas prices – and that’s bad! Discomfort? yes. However, US GDP and consumer spending have repeatedly proven that oil and gas prices are not a major economic driver. The global economy and stock prices have fared well even as energy prices continue to soar, far exceeding potential energy prices in 2024.
Enjoy this bull market as energy drives stock prices higher.
Ken Fisher is the founder and executive chairman of Fisher Investments, a New York Times bestselling author, and a regular columnist in 21 countries.
