Energy stocks have plunged hard in the past few days as crude oil prices continued crashing. The Vanguard Energy ETF (VDE) has retreated in the past four consecutive days, moving to its lowest point since August 5. It has dropped by over 12.5% from its highest point this year, meaning that it has moved into a contraction.
Brent and WTI prices have crashed
Crude oil price has been in a strong downtrend and the downtrend may continue. Brent, the global benchmark, plunged to a low of $70.65, its lowest point since March last year, and down by over 25% from its highest point in 2023.
The West Texas Intermediate (WTI) price has also dropped by over 28% from its highest point in 2023. It is also hovering near the lowest point since March last year.
Natural gas is also not doing well as its price has dropped by over 35% from its 2023 high and by over 75% from the 2022 high.
Crude oil has crashed even after the OPEC+ cartel decided to continue with the supply caps for another two months. While the deal helped to stabilise prices recently, the reality is that the energy market is facing significant glut risks.
A key issue is that non-OPEC members are pumping record amounts of oil. A report by TD Bank estimated that Canada’s oil production will jump to between 5.2 million and 5.4 million barrels per day this year, a record high.
In the United States, production has passed over 13 million barrels per day and Donald Trump has hinted that he will promote more production if he wins the presidency.
Other countries are expected to start pumping more oil soon. Uganda, a country that has never produced oil, is expected to start shipping its oil in 2023. Other countries like Brazil, Guyana, and Namibia are expected to continue boosting production.
Wall Street analysts lowers oil prices forecast
Therefore, there is a risk that crude oil prices will continue plunging. JPMorgan analysts estimate that Brent could plunge to a low of $60 a barrel.
Similarly, Goldman Sachs analysts recently lowered its oil price forecast to about $70 a barrel while Citi estimates that price could dip below $60 and to as low as $50. The same is true with Bank of America, which sees prices falling.
Wall Street banks’ oil forecasts should always be taken with a grain of salt since, in the past, they have been highly inaccurate. Just last year, analysts at Morgan Stanley warned that oil prices would jump to $150.
In addition to higher supplies, analysts cite the ongoing global economic slowdown as a key catalyst for the sell-off. China, the biggest oil consumer, is struggling to hit its 5% GDP growth. Most analysts, including those from Fitch, JPMorgan, and Goldman Sachs have downgraded their Chinese GDP estimates.
In a recent report, the International Energy Agency (IEA) warned that demand will rise by less than 1 mb/d in 2024 and 2025, much lower than the previous estimate of 2.1 mb/d.
MLP energy stocks are doing well
The ongoing oil and natural gas weakness has pushed prices of top energy stocks significantly lower.
In London, Shell share price has dropped in the last six consecutive days, moving to its lowest point since March. It has dropped by almost 16% from its highest point this year, making it one of the worst-performing supermajor.
BP stock has also plunged to 405p, down by 23% from its highest level this year. Chevron has fallen by 14.2% while Exxon has held much better, falling by over 7.4% from the year-to-date high.
Other top energy companies, including Warren Buffett’s favorite stock, Occidental, has slipped to $52, down by over $20 a barrel from the YTD high.
However, another type of energy stocks is doing well: Master Limited Partnerships (MLP). These are popular companies that transport, store and process crude oil and natural gas. They are often contracted by companies like Chevron and Exxon because of their large pipeline networks.
The Alerian MLP ETF, which tracks the biggest MLP companies in the industry, was trading at $46, down from the year-to-date high of $48.
Enbridge, a Canadian company, has been one of the best-performing MLP as its stock surged to $40.80, up by over 27% from its lowest point this year. It is hovering near its all-time high.
Kinder Morgan, another popular MLP, has jumped to $21.15, its highest level since July 2015 and 200% from its lowest point in 2020.
The Williams Companies, which I wrote about recently, has moved to a record high of $46, 540% above its pandemic lows. Enterprise Products Partners (EPD) is also hovering near its all-time high.
These companies are thriving because of their higher dividends and the fact that their revenues are not fully dependent on oil prices.
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