An anxious friend asked me the other day why her energy stocks were going down. She’d invested a fair chunk of her portfolio in oil and gas stocks and was shocked to see her shares were losing value.
At first glance, the sector looks strong. The S&P/TSX Capped Energy Index was up 21.86 per cent for the 52 weeks to June 14. But drill down a little deeper and a disquieting pattern appears. The year-to-date gain is 12.58 per cent. The quarter-to-date return is negative-4.43 per cent. June shows a loss so far this month of 9.2 per cent.
The trend is obvious. The big energy boom appears to have peaked around April 10. My friend bought in at what seems to have been the top and now must decide whether to take losses or ride it out and hope the cycle turns back up again.
This is happening even though oil futures briefly rose last week after the U.S Department of Energy projected global demand would rise this year by 1.1 million barrels per day (bpd), up from a previous forecast of 900,000 bpd. This would imply a supply deficit, as world production is expected to rise 800,000 bpd this year.
But that short-term outlook was overshadowed by a new report from the Paris-based International Energy Agency (IEA) that said global oil demand will continue to slow in the coming years until 2030, when oversupply will force the closure of some production facilities.
“World oil demand growth continues to slow, with 2024 gains now seen at 960 kb/d [thousands of barrels a day], 100 kb/d below last month’s forecast,” says the latest IEA Oil Market Report. “Weak OECD deliveries pushed global demand into a narrow y-o-y contraction in March. Subpar growth of 1 mb/d (million barrels a day) in 2025 is held back by a muted economy and accelerating clean energy technology deployment.”
The report says that refining margins in Asia were at three-year lows in May and that production may need to be curtailed. U.S. Gulf Coast refining profitability has slipped back to six-month lows.
The long-term outlook for oil is for steadily diminishing demand, says the report, combined with a surge in production capacity, led by the U.S.
“Total supply capacity is forecast to rise to nearly 114 million barrels a day by 2030 – a staggering eight million barrels per day above projected global demand,” the report finds.
The result would be levels of spare capacity comparable to those experienced at the height of the COVID-19 lockdowns in 2020.
“Spare capacity at such levels could have significant consequences for oil markets – including for producer economies in OPEC and beyond, as well as for the U.S. shale industry,” says the report.
At the same time, the transition to clean energy will accelerate. The net result will be a slowdown in global oil demand and, presumably, a decline in oil prices.
“This report’s projections, based on the latest data, show a major supply surplus emerging this decade, suggesting that oil companies may want to make sure their business strategies and plans are prepared for the changes taking place,” said IEA executive director Fatih Birol.
The implication for investors is not to overweight your portfolio with fossil fuel stocks. The market isn’t going to collapse tomorrow, and we may well see temporary price spikes caused by geopolitical developments that will drive shares higher. But, if the IEA projections are correct, the medium- to long-term outlook for oil is bleak. Plan accordingly.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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