Oil And Natural Gas Macro In 2025 Is Shaping Up Nicely For Energy Stocks
By: Jon Costello
In light of today's horribly negative sentiment toward the energy sector, I’m going out on a limb and stating that 2025 will be bullish for E&P stocks. The past few years have been more favorable to midstream, which has benefitted from a historic increase in natural gas throughput volumes and their associated downstream infrastructure requirements. Next year, I see the fundamental momentum shifting to E&Ps as improving supply/demand drives oil and natural gas prices higher. I expect improved investor sentiment to follow, pushing our favorite E&P stocks higher.
As we head into 2025, E&Ps have several factors going for them:
Their stock prices are entering the year at low levels. Many E&P stocks are discounting WTI prices below the current, already low level of $70 per barrel. The discount to the current oil price is attributable to investor sentiment toward the sector, which is the worst it’s been since 2020. There is plenty of room for E&P stocks to outperform should the macro backdrop prove to be more bullish than expected.
Next year's wild cards may turn out in favor of the bulls. The foremost relates to Iranian sanctions. The U.S. has sanctions on Iran that the Biden administration made clear it wouldn’t enforce. Trump is more likely to enforce the sanctions absent significant concessions from the Iranian regime. Trump’s election has already caused tankers at risk of violating U.S. sanctions to avoid transporting Iranian crude. Evidence can be seen in the building Iranian oil storage in recent weeks.
Another wild card will be the success or failure of Trump’s “Drill Baby Drill” campaign. We don’t see U.S. E&Ps enthusiastic about increasing production under any circumstances, let alone political goading, so count us squarely in the “failure” camp.