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Executive summary│Energy 2024 outlook
Balancing cyclical and structural support with the dark side of "higher for longer"
Energy was the big loser in 2023
Our energy complex conviction is one of balance with bearish skews in 2024
Our supercycle thesis is merely delayed – not derailed
We recommend tactical positioning across the energy sub-groups with a large degree of heterogeneity
- Energy was the worst performing commodity sub-group in 2023. A confluence of concerns surrounding demand from higher for longer rates, recession obsession fears, manufacturing destocking, oil supply beats and favourable weather for gas markets dominated the energy landscape.
- We classify the year 2024 for the energy complex as one of balance with bearish skews.
- Global oil markets will remain supported by tight micro fundamentals (moderate deficits), OPEC+ driven carry and effective hedging value against negative geopolitical supply shocks. Meanwhile, remarkably high European gas inventories, no net US gas demand growth and benign conservation efforts across both sides of the Atlantic, will keep gas markets in good order.
- Juxtaposed against this constructive picture are taxing downside risks anchored on the dark side of “higher for longer” interest rates. Until core inflation firmly settles down, an on-hold Fed with rates remaining higher for longer than markets are pricing is a real risk in 2024. Such headwinds will continue weighing in on energy demand. Succinctly, the landing has been very soft so far, but will get bumpier in 2024.
- Having said that, as we catalogued in our commodities 2024 outlook (see here), we critically caution that the supply-constrained decades-long supercycle is merely delayed – not derailed – given the structural underinvestments miring the energy complex. We hold conviction that these long-term structural challenges facing energy markets remain unresolved and will move top of mind as soon as the current macro headwinds are in the rear-view mirror. Put differently, cyclical bearish headwinds today, structural bullish tailwinds tomorrow.
- Examining energy sub-groups, a large degree of heterogeneity mires the complex that warrants a tactical approach in 2024:
- Crude oil (neutral). Active OPEC+ market management will aim to maintain the USD80-100/b oil corridor, with a USD80/b floor from the OPEC+ put from its inelastic pricing power, and a USD100/b ceiling from the group’s reluctance to push timespreads to extreme levels that would bring forward demand destruction for its own barrels.
- European natural gas (neutral-to-bearish). Higher-than-average gas inventories and another mild winter will offset a modest rebound in industrial demand as well as skittishness in pricing in geopolitical risk premium.
- US natural gas (bearish). Balances remain oversupplied, driven by a higher storage starting point, lower annualised power burns and benign gas production growth – as such, US Henry Hub gas price risks skew to the downside.