Lower oil prices will persist into 2024: Portfolio Manager

Wed, Dec 6, 2023, 2:09 PM

JOSH LIPTON: It has been a wild year for the energy market. And in recent weeks, the market reaction to wars in Ukraine and Israel changes in government policy and, of course, production cuts. But its concerns about demand weighing on crude today oil falling below $70 a barrel. And our next guest believes prices will stay low heading into 2024. Rob Thummel, Tortoise Senior Portfolio Manager, joins us with his take on the energy sector next year. So Rob, thank you for joining us. Appreciate it.

ROB THUMMEL: Thanks for having me.

JOSH LIPTON: So US crude today, Rob, drops about 4%. So now we close at the lowest level, I think, since June. Help us, Rob, just understand what you see as driving those moves and also just what you see ahead for next year.

ROB THUMMEL: Well, for right now, it's sentiment. So when you get this negative sentiment, it's really hard to turn that ship and get it to turn to be positive. So what will change that? Well, it will be actually fundamentals. It will be inventories, global oil inventories starting to fall.

How is that going to happen? Well, you're going to need the OPEC Plus members to basically cut their production. You're going to need the US to not grow as much. And you're going to need demand to come back in 2024. However, we've got a long time yet before we're going to see that actually that data show lower global oil inventory demand.

JULIE HYMAN: So is your base case then that oil prices stay at this level or in a range near this level for the foreseeable future?

ROB THUMMEL: Yeah, Julie. So the way that the reporting works is you won't actually see global oil inventories for January until March or April of next year. So you actually won't see that actual data showing global oil inventories declining until then. And so I see-- I don't see oil prices rising dramatically anytime soon, which, oh, by the way, that's not a bad thing for us as consumers. And that's also a good thing to keep inflation lower as well and maybe help keep the Federal Reserve from raising rates anymore.

JOSH LIPTON: Yeah. And it's interesting, too, Rob, and Ines brought this up, it was just late last week, OPEC and its allies come out. They make headlines. We were talking about on this show saying, OK, deeper production cuts are on the way. But investors just don't seem to believe them.

ROB THUMMEL: Yeah, no. And that's a good point, Josh. So if the cuts happen, oil inventories will actually decline. And they'll decline pretty fast, because we will-- the global oil market will be undersupplied in the first quarter of 2024. Now why is that important? Well, the first quarter is traditionally the lowest demand quarter of the year. Just seasonally, it's just a lower demand quarter.

So usually, the oil market is oversupplied in the first quarter and then is undersupplied for the rest of the year. In this case, you could have an undersupplied oil market. Once again, we won't be able to know that for sure until March or April. But if everybody holds and does cut as they say they're going to, we'll see oil prices rise at some point in time.

JULIE HYMAN: OK. So let's talk about what all this means for the oil stocks. I was looking at the charts there earlier. Oil energy shares in the S&P 500 have fallen quite a bit since September, just as oil has. But they haven't fallen as much, at least not collectively. So what kind of movement are we going to see commensurate with oil prices going into next year?

ROB THUMMEL: Yeah. So the energy sector, why invest in energy sector right now? Commodity prices have a little bit of impact on certain areas of the sector. In particular, like Exxon and Chevron, their cash flows go down if oil prices go down, if natural gas prices go down.

But the other thing is the positive, and the reason why investors should be looking at the sector, is even with these lower oil prices, the free cash flow yield of the energy sector is over 10%. The free cash flow yield of the S&P 500 is about 5%. That spread, in my opinion, is just way too wide. The energy sector is just too important, too essential, for the sector to continue to trade at such a discount to the S&P 500.

So what does that mean going forward? Well, I think the energy sector can continue to, not only meet the S&P 500 return, but actually exceed the S&P 500 return. So it's a good place for investors to be looking to allocate capital as they look at their investment portfolios in 2024.

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Lower oil prices will persist into 2024: Portfolio Manager

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