Wall Street Cautious on Energy Stocks as Oil Glut Limits Potential for Rally

Wall Street is bracing for another tough year for energy stocks, anticipating that a surplus of oil supplies will prevent geopolitical tensions from driving a significant increase in crude prices.

The Mizuho U.S. Oil & Gas research team has released its 2024 industry outlook, recognizing positive micro-level fundamentals such as capital efficiency, improved well productivity, robust cash returns, and merger and acquisition activity within the sector. Despite these favorable internal factors, overarching macroeconomic challenges warrant a conservative stance, leading analysts to predict that oil and natural gas prices will remain within narrow bands, thus muting overall excitement for the industry's prospects.

Reflecting this cautious approach, Mizuho downgraded eight oil and gas producers and reduced price targets for several others. This indicates a tempered outlook from Wall Street.

Contrary to forecasts from a year ago that saw the international oil benchmark climbing from $86 to over $100 a barrel, Brent crude futures actually fell by 10%, closing 2023 around $77 a barrel.

Behind the surprise: actions by the Biden administration and U.S. oil companies that resulted in an unexpected surge of petroleum supplies.

The invasion of Ukraine by Russia had many predicting a steep drop in Russian oil exports due to Western sanctions. However, a novel price-cap mechanism, spearheaded by the U.S. and adopted by allies, managed to restrict Russia's oil income while keeping its oil supply mostly uninterrupted.

Similarly, relaxed U.S. enforcement of sanctions let Iran increase exports to countries including China and Venezuela, further weighing on prices.

At the same time, the U.S. saw record-breaking oil production last year, attributed to more efficient drilling practices, which led to an expected average of 12.9 million barrels a day of crude oil production in the current year—up significantly from 2022.

This increase in output softened the impact of OPEC and its allies' production and export cuts meant to elevate prices.

Looking ahead to 2024, the durability of the U.S. fracking boom is uncertain. Tighter credit and rising interest rates have caused private oil producers, who have been key to recent production growth, to scale back drilling activities. The number of operational oil rigs in the U.S. has notably decreased.

Concurrently, major public shale companies have improved their drilling efficiency, the long-term impact of these advancements remains to be seen. Drillers in Guyana and Brazil also ramped up production in 2023, although not to the extent of the U.S. shale industry.

Analysts generally expect oil prices to remain stable in 2024, but caution that unpredictable geopolitical changes could disrupt this balance.

UBS Group AG has recently lowered its oil price forecasts, projecting Brent to stay within an $80 to $90 range this year, taking into account the swollen spare production capacity.

In the absence of major global conflicts, Goldman Sachs's Daan Struyven believes Brent will fluctuate between $70 and $90 a barrel, with OPEC likely adjusting its output in response to price movements.

J.P. Morgan's Natasha Kaneva estimates an average price of $83 a barrel for Brent in 2024, citing OPEC's challenge to sustain high oil prices in light of slow global demand growth and emerging new offshore oil sources.