Oil Profits Flow And Demand Outlooks Grow
Oil is starting to extend gains after a muted start to 2024. What next for oil and the big corps?
Oil has had a relatively calm year so far, especially if we were to compare it to the previous two. 2022 saw an unexpected surge higher following Russia’s attack on Ukraine. Then, 2023 had markets paying closer attention to OPEC’s production as Saudi Arabia cut by 1 million barrels a day, starting off a rally that had crude rising from $70 to $90.
A monotonous first few weeks of this year saw oil trade within a small range of about $4. Now, things are starting to get moving again. It’s time to take a look at the outlook for oil and the big corporations.
Exxon and Chevron
To close out 2023 with Q4 earnings, the three biggest oil players (ExxonMobil, Chevron and Shell) have kept their promises of starting new oil and gas projects while also managing to reduce their costs and return an attractive amount of money (more than $80 billion, up from $78 billion the previous year despite lower oil prices) to their shareholders. It’s a model for the notoriously boom-and-bust industry. But now, the challenge of continuing this performance arises.
Oil producers need to focus on being boring cash machines to keep investors on board. There are only so many energy crises and geopolitical events that can keep prices higher to boost profits.
The companies are also having issues competing with the tech industry. Equity investors remain extremely optimistic about the future of tech, and the adoption and rapid growth of artificial intelligence are fuelling the premiums that markets are willing to pay, which seems fair. AI and cloud computing offer decades of potential profit growth, while the transition to lower-carbon energy poses an existential threat to the oil majors.
Energy makes up just 3.7% of the S&P 500 Index and trades at half the value. Investors need to view oil as moving back into an era of scarcity for the sector to trade at a higher multiple.
One positive for investors is buybacks. On the basis of dividends and share buybacks, Exxon and Chevron were last year among the top-10 payers in the S&P 500 Index. The only two other industrial companies among the 10 were drug giant Johnson & Johnson and military behemoth RTX Corp.
So, for Exxon and Chevron, there is potential for continued positive performance in 2024, but there are hurdles to overcome. And as an investor, you want to be looking to allocate your capital to the best opportunities that fit your approach. If it were just between the two options, would you go tech or energy?
Let’s turn to global oil demand. How much can that have a part to play? And how would we trade a move higher in oil?
Global Oil Demand - Robust Or Bust?
Well, according to Saudi Aramco Chief Executive Officer Amin Nasser, demand is set for another year of “robust” growth.