A look at the global energy space, Australian oil and gas, and the year ahead
The price of Brent Crude is currently hovering at a two-month high, while international gas prices are at pre-COVID lows
Australian gas prices, however, remain elevated compared to European and US prices
Australia’s major energy stocks are mixed, with Bell Potter expecting relatively flat earnings in 2024 compared to 2023, as US majors are now experiencing steep earnings losses
The question of what Brent Crude oil, in particular, will do in the second half of CY23 remains hard to predict, but traders are starting to pay attention to the latest OPEC+ cuts
The energy sector and COVID-19
The COVID-19 era was defined by a volatile energy market, with high fuel costs and fluctuations in share market values.
COVID lockdowns led to the ramping down of oil and gas projects. When the demand for oil and gas surged later on, it was difficult to bring the projects back online quickly, resulting in a supply shortage and increased prices.
During this time, coal prices also rose after a steep downward trend.
But all this isn’t the case anymore
However, the situation has changed now. While inflation remains, fuel prices are currently on a downtrend back to ‘normal,’ despite reaching a two-month high this week.
Nevertheless, the bullish case for energy in 2021-2022 has subsided. Exxon’s earnings, for instance, are expected to be significantly impacted for Q2, around US$4 billion, due to lower gas prices and refining margins.
Refinery margin decreases are also affecting Australia, with analysts expecting earnings hits on lower margins for Ampol (ALD) and Viva (VEA).
The global shipping index, which reached its peak during the COVID-19 era, is now declining, contributing to the decrease in goods inflation.
As of July 6 this month, Drewry’s world-leading World Container Index decreased by 1.3 per cent to US$1,474 per 40-foot container – an 86 per cent decline below the peak of US$10,377 hit in September 2021.
While shipping costs are not entirely pegged to fuel prices, the decline of the WCI in tandem with world fuel prices is hard to separate.
Australia’s gas price situation
To understand how Australia’s gas affordability situation is diverging from that in the United States and the European Union over the last 12 months, the three below charts sum it up pretty well.
US GAS PRICES: 5Y CHART
Over the last year, US gas prices have fallen 55.75 per cent at Henry Hub, the major US port which determines the price of natural gas.
EU GAS PRICES: 5Y CHART
Over the last year, EU gas prices have fallen an even steeper 81.63 per cent, particularly as overlapping concerns about Russian gas supply have tamed following its invasion of Ukraine.
The “TTF” refers to ‘Title Transfer Facility,’ the term attached to the Netherlands’ largest marine export terminal, which determines the price of EU gas futures.
AUS GAS PRICES – 11Y CHART
Meanwhile, there’s no publicly available terminal-like pricing chart product available for Australian gas futures, however, the Australian Energy Regulator does offer a wholesale gas price chart on its website.
Over the COVID period, we’ve evidently gone the other way. Something to keep in mind.
Brokers’ views on Australia’s major energy stocks
One other interesting chart is the below from Bell Potter, which shows how the ASX Energy index is comparing against the S&P 500’s, as well as international peers, released as part of the Australian broker’s latest Energy Weekly.
Bell Potter expects 2024 earnings (EBITDA) for the Australian oil and gas majors to reflect the following:
Woodside Energy (WDS) $16.1 billion (vs. $15.1 billion in 2023)
Santos (STO) $6.6 billion (vs. $6.9 billion in 2023)
Origin Energy (ORG) $3.06 billion (vs. $2.9 billion in 2023)
Beach Energy (BPT) $1.3 billion (vs. $1.07 billion in 2023)
The uncertainty of oil prices
Predicting oil prices is always challenging. Several factors currently influence Brent Crude futures prices, which, in turn, impact fuel prices:
BRENT CRUDE
Brent Crude Oil is the international benchmark the world outside of America uses. The other major US benchmark, West Texas Intermediate (WTI Crude) is almost always several dollars cheaper than Brent and should be disregarded for Australian readers who are not directly trading WTI futures.
There are three big thematics right now helping to define and shape Brent Crude futures prices, which in tandem end up deciding fuel prices. Those are:
OPEC+ supply cuts
Chinese re-opening
Recessionary risk
OPEC+ continues to cut oil supplies to increase prices. China’s government has shown interest in introducing stimulatory measures, potentially boosting oil prices. The lack of a Chinese re-opening boom has contributed to the initial disinterest in OPEC’s cuts.
The occurrence of a US recession or Chinese recession will also heavily impact oil prices. A Chinese recession could be a headwind for oil prices but beneficial for consumers at the pump.
Published: 12-07-2023
