Expect energy stocks to face headwinds in 2024 as spare oil capacity puts downward pressure on the crude markets, according to Citi analysts.
“Pressure on oil prices is coming from rising spare capacity,” wrote Alastair Syme, managing director at Citi, in a note to investors.
Spare capacity, as defined by the Energy Information Administration, is an estimate of the volume of oil production that can be brought online quickly and sustained for at least three months. Essentially, it’s a country’s ability to dial up oil production if needed.
Since 2000, in nine out of the 10 years in which global spare capacity has been above 3 million barrels per day, oil equities have underperformed the broader market, according to a note published by Citi. The analysts forecast 4 million barrels per day in 2024, with oil prices falling into the low $70s by the end of next year.
“Some have argued that the oil industry is underinvesting, but this view is simply not backed up by the data. Since the formation of the expanded OPEC+ in 2016, global spare capacity has built by 1.5 mbpd [million barrels per day], 80% of which has come from the US,” reads the Citi note.
An oil pumper stands in a field along Interstate 25 on Thursday, Nov. 30, 2023, near Erie, Colo. (David Zalubowski/AP Photo) (ASSOCIATED PRESS)
The analysts went on to say “building spare capacity breeds both commodity and asset price-deflation.”
Oil is down about 4% year to date, despite efforts by the Organization of the Petroleum Exporting Countries and their allies — known as OPEC+ — to maintain a pricing floor through supply reductions.
West Texas Intermediate (CL=F) and Brent (BZ=F), the international benchmark price, were trading at about $73 and $78 per barrel, respectively, on Tuesday.
Analysts expect demand next year to be met by increased supply from producers outside OPEC+, like the US and Guyana.
“OPEC+ will likely continue to act to limit the extent of price-deflation but finds itself in a vicious circle of sacrificing market share to defend a price that, evidenced by growing supply, is still above marginal…