Storm clouds approaching.  It was a great September for the overall markets, while energy lagged.  The S&P500 gained +3.6%, the Nasdaq Composite added +5.7% and energy lagged at  -0.3% (S&P 1500 Energy, S15ENRS).  September’s energy subsector performance was as follows:  Oilfield Services +1.2% (OIH), Upstream +0.1% (XOP), Midstream -3.7% (AMZ), and Clean Energy +7.6% (ICLN). Front month WTI continued drifting lower, declining -2.6% to ~$62.35/bbl.  Natural gas rallied +10.2% to ~$3.30 mmbtu)⁽¹⁾.

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September was characterized by cuts and adds.  The energy industry is cutting costs/headcount to drive corporate efficiencies and combat lower oil prices.  OPEC+ continues to add more barrels to global supply.  The $60/bbl WTI barrier was breached to the downside in October as trade tensions between the US and China flared again, while impending global inventory builds are becoming more obvious.  Empirically, current prices are not discouraging supplies – OPEC+ continues to return barrels to the market, while US shale companies forecast higher y/y oil production in 2026.  Perhaps the globe simply needs more oil in storage to reflect increasingly isolated regimes? Maybe the barrels flowing into China’s inventory will never flow back out and will be held to buffer them against future economic scuffles with the US.  Or maybe oil prices will have to go lower to force lower production.  We suspect the latter but respect the possibility of the former.  

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With so many moving pieces, PEP hosted a webinar on September 25^th entitled Oil Markets – Winter is Coming?  A replay can be found at the following link: Crude Holding Above $60 – But Can It Last? and a copy of the slides can be obtained by emailing Chris Jacobe at cjacobe@pickeringenergypartners.com

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Despite fears of an oil slowdown, it hasn’t been a watch-and-wait world.  The energy industry continues to move pieces on the asset chessboard.  Over the past six weeks, California producers California Resources (symbol CRC) and Berry Corp (symbol BRY) agreed to merge, Occidental sold its OxyChem chemicals business to Berkshire Hathaway, Chord Energy did a Bakken bolt-on (assets sold by Exxon) and KKR/Blackstone put billions into Sempra’s Port Arthur LNG project.  Remarkably, this is a pittance compared to the frenzy in the power world, where companies are scrambling to deliver speedy electricity to AI/data center projects.

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Considering the macro storm clouds, energy stocks have held in well.  Diversified Energy (S&P1500 Energy) is +6% YTD through September.  Lagging the market, but impressive given WTI is -13% and gas is -9% over the same time period.  By our analysis, Upstream stocks are discounting long-term oil prices below $60 (and below the 5 year futures strip).  These are attractive valuations, but the timing isn’t compelling and we continue to look for better spots to get aggressive on the sector.  That time will come.  

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As always, we welcome your questions and comments.

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(1) Bloomberg