The Energy Sector Is A No-Brainer, but There’s More to Come
Historically, different market sectors and investments have responded differently as the economy moves from one stage of the business cycle to the next. Understanding how various financial assets have historically performed at various points in the business cycle can help investors identify opportunities and risks and adjust their portfolios accordingly. Shifts from one phase of the business cycle to the next have historically taken place every few months or years on average. With the global monetary tightening cycle almost over, many major economies, including the U.S., have advanced into the late stage of the business cycle. According to Fidelity Investments, technology, financials, and consumer discretionary sectors tend to outperform during the early and mid-stages of the business cycle while energy and commodity stocks tend to be late-stage winners. Well, the U.S. stock market appears to be largely playing out along those lines, with tech lagging while oil and gas stocks have emerged as some of this year’s best performers. The energy sector has managed to post a 17.1% return in the year-to-date, the second highest sector return and nearly double the 9.1% return by the S&P 500 and 7.1% gain by the tech sector. Interestingly, not even a red-hot labor market and diminished prospects for interest rate cuts have slowed the energy sector. Last week, energy and communication were the only sectors to finish in the green while the S&P 500 dropped nearly a percentage point, its biggest weekly loss so far in 2024, following a healthy jobs report. A report released by the Bureau of Labor Statistics revealed that the country added 303,000 new jobs in March, way higher than the 205,000 consensus call among economists surveyed by FactSet or 231,000 jobs added in March 2023. The unemployment rate slipped to 3.8% from 3.9%, marking the 26th consecutive month unemployment has remained below 4%, the longest streak since the 1960s. The markets, however, reacted negatively to the solid jobs report because it’s likely to make the U.S. Federal Reserve even more hesitant to be urgent or aggressive with interest rate cuts. Indeed, some economists now say recent data has pushed a summer cut completely off the table while others are saying to expect zero cuts in 2024. “Personally, I wouldn’t be surprised if we saw less rate cuts and pushed more towards the end of the year. This is a strong economy. Make no mistake, it is backed by debt and somewhat by overburdened credit cards, but it is a strong economy. So the Fed will struggle to find the case to cut rates soon,” George Lagarias, chief economist at Mazars, told CNBC on Monday. According to the CME’s FedWatch tool, the market is pricing a less than 50% probability of a rate cut in June and July, significantly lower than a month ago. Whereas high interest rates tend to hurt many sectors of the economy, clean energy companies are much more sensitive to interest rates than oil and gas companies. It’s the reason why the iShares Global Clean Energy ETF (ICLN) has returned -11.2% vs. 17.0% YTD gain by the Energy Select Sector SPDR Fund (XLE). Robust Fundamentals Another interesting development: even the bears now recognize the energy sector’s momentum. To wit, Morgan Stanley remains pessimistic about the U.S. stock market overall; however, MS has upgraded energy stocks to overweight from neutral, noting that energy companies have lagged the performance of oil, and the sector remains favorably valued. With a PE ratio of 13.4, the U.S. energy sector is the cheapest of the 11 market sectors. However, the most important catalyst working in favor of the energy sector is robust market fundamentals. Commodity analysts at Standard Chartered have reported that fundamentals in the oil markets remain strong and can support Brent prices in the $90s. According to StanChart, there’s ample room for OPEC to increase output in Q3 without either causing inventories to rise or prices to weaken. According to StanChart, the U.S. market swung into a deficit of over 1.7 mb/d in both February and March, with the seasonal recovery in demand offsetting the recovery in U.S. output from its January low. The analysts estimate there was a counter-seasonal Q1 inventory draw of 1.12 mb/d, which led to a significant tightening compared with the inventory build recorded in Q1-2023. StanChart attributes the ongoing oil price rally to the 3 mb/d relative improvement from Q1-2023, and sees further price gains coming in Q2-2024.
India’s fuel consumption shrinks 0.6% in March as petcoke use falls
Fuel consumption in India, a proxy for oil demand, fell by a marginal 0.6 per cent on an annual basis in March due to reduced petroleum coke use, as data released by the Petroleum Planning and Analysis Cell (PPAC) has shown. Consumption of fuel totalled 21.09 million tonnes (mt) in March, down from 21.22 mt in March 2023. For FY24 (2023-24), fuel consumption rose by 4.6 per cent. However, this was lower than the 10.57 per cent rise seen in FY23. Oil demand usually picks up from late February onwards and rises in tandem with the temperature in India. For instance, consumption rose by 13.7 per cent in March, on a sequential basis. Sales of diesel, the most used fuel in the country, rose 3 per cent to 8.03 mt in March. In the last 12 months, sales had reached an all-time high of 8.21 mt in May 2023 Petrol sales also reached a four-month high, rising 5.1 per cent to 3.14 mt in October. Sales had stood at 2.99 mt in the same month of the previous year. Other major categories also saw rising sales. The monthly numbers were pulled down by the lower consumption of petcoke, a by-product created by the refining of bitumen into crude oil. Used in the manufacturing of steel, glass, paint, and fertilisers, petcoke usage fell 16.8 per cent in March to 1.63 mt.
Are Oil Prices Heading To $100 This Summer As A Global Shortage Takes Hold?
When oil jumped above $90 a barrel just days ago, military tensions between Israel and Iran were the immediate trigger. But the rally’s foundations went deeper — to global supply shocks that are intensifying fears of a commodity-driven inflation resurgence. A recent move by Mexico to slash its crude exports is compounding a global squeeze, prompting refiners in the US — the world’s biggest oil producer — to consume more domestic barrels. American sanctions have stranded Russian cargoes at sea, with Venezuelan supply a potential next target. Houthi rebel attacks on tankers in the Red Sea have delayed crude shipments. And despite the turmoil, OPEC and its allies are sticking with their production cuts. It all adds up to a magnitude of supply disruption that has taken traders by surprise. The crunch is turbocharging an oil rally ahead of the US summer driving season, threatening to push Brent crude, the global benchmark, to $100 for the first time in almost two years. That’s amplifying the inflation concerns that are clouding US President Joe Biden’s reelection chances and complicating central banks’ rate-cut deliberations.
Biden’s LNG export pause will hobble Asia’s energy plans
As Japanese Prime Minister Fumio Kishida arrives in Washington this week to meet with Joe Biden, it is worth reflecting on the American president’s decision in January to pause approvals for new liquefied natural gas exports. First, it is important to understand how critical gas from the U.S., the world’s biggest exporter of LNG, is for Asia. Asia is a net importer of energy and depends on other parts of the world to keep industry going and households powered. Second, much of Asia relies on high-emitting coal for electricity generation, particularly fast-growing Southeast and South Asia where lifting people out of poverty remains a primary goal. Of total coal demand worldwide last year, three of every four tons were consumed in China, India or Southeast Asia. In Japan, South Korea, Singapore, Taiwan and Thailand, LNG has an established role ensuring energy security and economic stability, while also providing the foundations for a low-carbon future. Massive volumes of coal must be displaced through the 2030s and beyond across emerging Asia to achieve the region’s net-zero aspirations. This inevitably will mean substantial gas imports As the sole realistic coal alternative in terms of affordability and energy density, LNG from the U.S. offers a much cleaner option for always-available power generation that, in partnership with renewables, can meet growing energy demand while facilitating climate progress. India, Vietnam and the Philippines are among the fast-growing Asian nations that plan to increase the role of gas in their economies through LNG imports as a reliable complement to renewable energy investment. Therein lies the concerning disconnect between Asia’s energy realities and the U.S. government’s LNG pause. National energy plans and research from regional experts who know Asia best, including The Institute of Energy Economics, Japan, indicates natural gas demand in the region over the next 30 years will be much higher than implied by the projections the Biden administration used to justify the export pause. These higher forecasts are driven by crucial differences in economic and demographic outlooks and the country-specific feasibility of scaling renewables at speed. Optimism is a positive attribute, but reality has no substitute. Utilization of the full export potential of U.S. LNG — which would be 52% higher than the level currently approved — will be required by 2040 to meet Asia’s demand during energy transition, according to a report last year by energy research company Rystad Energy commissioned by the Asia Natural Gas and Energy Association.
Asia’s March LNG imports surge amidst favorable spot prices
Asia’s imports of liquefied natural gas (LNG) rose sharply in March as the top-buying region took advantage of lower spot prices to draw cargoes away from Europe, as Reuters reported. A total of 24.16 million metric tons of the super-chilled fuel landed in Asia in March, up from February’s 22.73m and also up 11.5% from the 21.67m in March 2023, according to data compiled by commodity analysts Kpler. The strength in imports came as spot prices for LNG for delivery to North Asia remained muted in February and early March, when the bulk of cargoes would have been arranged. The spot price hit the lowest in nearly three years in late February, when it dipped to $8.30 per million British thermal units (mmBtu) in the week to Feb. 23. This was down from the northern winter peak of $17.90 per mmBtu in the week to Oct. 20. The spot price has shifted slightly higher in recent weeks, ending at $9.5 per mmBtu in the seven days to April 5, up from $9.4 the prior week. The small lift in prices is probably not enough yet to deter the price-sensitive buyers of LNG in Asia, which include India and South Asian neighbors Pakistan and Bangladesh, but also increasingly China. China’s imports of LNG rose to 6.61m tons in March, up from February’s 5.82m and 5.43m in March 2023, according to Kpler. China is the world’s largest LNG importer and it tends to buy more spot cargoes when the price is below $10 mmBtu as this allows the fuel to remain competitive in some areas of China’s partially regulated natural gas market. India’s LNG imports rose to a 40-month high of 2.29m tons in March, up from 1.98m February and 1.84m in March last year. This is the future home of the Rixos Baghdad, a luxury hotel financed by Qatar in the city’s heavily fortified Green Zobe
Russia’s Yamal LNG to resume LNG supplies to India’s GAIL – Kommersant
Russia’s Yamal LNG plant is set to resume liquefied natural gas (LNG) supplies to India’s GAIL under a long-term contract involving a Gazprom unit, Kommersant daily reported on Wednesday citing Russian government sources. Novatek, Yamal LNG’s main shareholder, has not replied to a request for comment. Kommersant said that supplies under the deal were suspended in 2022 when Germany seized assets of Russian energy giant Gazprom. GAIL agreed to a 20-year deal with Gazprom Marketing and Trading Singapore (GMTS) in 2012 for annual purchases of an average of 2.5 million tonnes of LNG on a delivered basis. At the time, GMTS was a unit of Gazprom Germania, now called SEFE, but the Russian parent gave up ownership of SEFE after Western sanctions. The initial contract with GMTS was also for supplies from the Yamal project in the Arctic, but the former Russian entity was arranging supplies from elsewhere to cut freight costs as the deal was done on delivered basis, industry sources said earlier this year. Kommersant said on Wednesday that the issue of LNG supplies to India has been resolved. It said, citing a source, that the deliveries are set to resume in the previous volumes in nearest future