Oil and the Stock Exchange

Ken Fisher: 'The energy sector will surprise the pessimists, supporting the Ftse Mib'

Oil prices are set to rise throughout the year, favouring Energy

by Ken Fisher

5 April 2024

2' min read

Key points

Oil prices
Incentive effect
Global application

2' min read

Tmy predictions for 2024 are confirmed by the performance of the shares, which continue their ascent, ready to perform well, if not very well, during 2024. However, energy stocks do not seem - for now - so 'energetic'. But be patient. Energy should take the lead later this year, surprising many. I will explain why.

Oil prices

Few expected the energy sector to decline by 0.9% in 2023, while world markets grew by 19.6%. Italian Energy shares performed better, gaining 19.1%, but lagged behind the overall +34.1% recorded by the Italian market.

After the 2022 outperformance fuelled by high oil prices, many began to see large supply shortages due to wars and OPEC+ cuts.

Yet by early 2023, oil had already collapsed from its March 2022 highs. The already high global production growth dispelled fears of a supply shortage and kept prices between $70 and $95, hampering energy companies, whose profits proceed in parallel with crude prices.

Today, many investors expect similar results in 2024, and are rushing to reduce their positions in energy stocks. However, oil prices are set to rise over the course of the year, favouring Energy.

Ken Fischer

Incentive effect

The reasons? Certainly not the long-discounted and largely symbolic OPEC+ production cuts, nor Biden's halt to the production of more liquefied natural gas - which in any case will not prevent the already active plants from guaranteeing an ample supply.

Rather, everything revolves around incentives. When energy companies saw the price rise in 2022, they increased production to capitalise. Today, US producers are completing wells faster than they are drilling others. Reserves of drilled and uncompleted wells in the US are down 17.9% y-o-y. This means that fewer stocks may be available quickly.

Producers are not replacing stocks. After years of preparation, the big drillers are now operational. With cautious production targets, rigs in the US fell from 621 at the end of 2022 to 506 today. Wells drilled in America are down 18.6% y-o-y. Production lags behind wells drilled by six months. It will soon slow down considerably.

Global demand

Meanwhile, many underestimate global oil demand, fearing pockets of weakness, for example in Germany. But a better-than-expected economic performance in the Eurozone, solid US GDP growth, and stable Chinese demand all point to a greater need for energy than analysts predict.

Therefore, oil prices are expected to rise, returning close to the highs of 2023. This, in addition to cost rationalisation, should fuel profits in the energy sector. The Italian market will benefit, although not as much as oil companies in the US and UK, which have better balance sheets, lower production costs and integrated business models.

Diversify globally, taking advantage of this bullish market, while waiting for Energy to shake up the markets later in the year.

Ken Fisher is Executive Chairman of Fisher Investments worldwide.