My 2024 Energy Sector Predictions

It is time to make my energy sector predictions for this year. The year promises to be challenging because there are more variables in play than normal. Russia’s ongoing invasion of Ukraine, the U.S. presidential elections, and the ongoing conflict in the Middle East are all factors that could have a major impact on the energy markets.

As always, I try to balance realistic predictions with those that are too obvious. I consider the discussion behind the predictions to be more important than the predictions themselves. That’s why I provide extensive background and reasoning behind all predictions. It provides additional context and often gives potential scenarios that could cause events to go in a different direction than expected.

With those factors in mind, below are my predictions for some of the significant energy trends I expect this year. I always strive to make predictions that are specific and measurable. At year’s end, there are specific metrics that will indicate whether a prediction was right or wrong.

1. Total U.S. oil production will again set a new annual production record.

Let me start with one that I think is easy. I made this prediction last year, and I felt it was aggressive. At the time I made it, I only felt like there was about a 50% chance of it happening. But a strong production surge in the second half of the year allowed U.S. oil producers to set a new production record by about mid-December.

We began 2023 with monthly oil production at 12.6 million barrels per day (BPD), which was short of the all-time monthly record of 13.0 million BPD. Current production is 13.25 million BPD, which is about 9.5% higher than it was a year ago. Thus, production could decline somewhat from here and still set an annual record.

The one thing arguing against a new record is that the number of rigs drilling for oil has now declined by nearly 20% from a year ago. In 2023, there had been a 27% increase from the previous year. A falling rig count will eventually impact production, but because of wells that were previously drilled but uncompleted (DUCs), it can take a while for rig count to negatively impact production.

I am betting that production won’t be significantly impacted in 2024 and that we see a new production record for the second straight year.

2. The daily average price of WTI in 2024 will be between $70/bbl and $75/bbl.

This one is tougher, but since oil is still the world’s most important commodity, I always predict the direction of oil prices. I make this prediction by looking at supply and demand trends, as well as inventory levels.

According to the Energy Information Administration, the average daily price of West Texas Intermediate for 2023 was $77.58/bbl, a bit lower than I predicted a year ago.

As I write this, the price of WTI is $72.68/bbl. The futures prices for oil this year trend slightly down over the year and are presently at $71.09/bbl for December 2024. Thus, the market isn’t currently expecting significant disruptions this year.

But things can change quickly in the oil markets. Saudi Arabia and Russia have been cutting production to prop up prices. I think both countries would like to see Donald Trump return to the White House, and one way to help him out would be for consumers to feel the pain of higher oil prices as the election approaches.

The Biden Administration has promised to refill the Strategic Petroleum Reserve, which it largely depleted in 2022 to tame oil prices. That would put upward pressure on oil prices, which is why I don’t think there will be a significant effort to refill it this year (next prediction). However the low level of the SPR is a bullish indicator, and it increases the upside risk in the oil markets.

Countering the upward pressure will be the ongoing expansion of U.S. oil production. That is the main factor that has prevented Saudi Arabia and its partners from significantly boosting oil prices.

Given all we know, I think the odds are that oil prices won’t change a lot in 2024, in either direction. I don’t think we will reach an average as high as last year’s, but I do think the yearly average will be a little higher than the current price. I don’t think we will veer too far from current prices on average.

3. The Biden Administration won’t replace more than 10% of the oil removed from the SPR since Biden was inaugurated.

The current level of the SPR is 287 million barrels lower than when President Biden was inaugurated. The SPR was utilized heavily in 2022 in an attempt to curb oil prices following Russia’s invasion of Ukraine. Although there have been some small purchases to replace some of the oil that was removed, historically presidents have tended to withdraw from the SPR in election years in an attempt to prevent gasoline price spikes leading up to the election.

Therefore, I don’t see the Biden Administration replacing more than a token amount in the SPR this year. Presently the SPR volume is about 8 million barrels higher than it was in July 2023, so there has been some oil put back in. To replace 10% of the oil that has been removed since Biden took office, about 29 million barrels would need to be replaced.

That means that in 2024, another ~20 million barrels would need to be replaced. I predict that will not happen. By the time the summer driving season and the change to summer gasoline blends arrives in May, I think the SPR purchases will be suspended.

4. The average natural gas price will be higher than it was in 2023.

Last year the average Henry Hub natural gas spot price fell to $2.53/MMBtu, which was less than half the 2022 average. This was primarily a consequence of the ongoing boom in U.S. natural gas production. Record exports of U.S. liquefied natural gas are now substantially mitigating global natural gas prices.

Only twice in the past 20 years has the price been lower than last year’s average, so that argues for a higher price this year. The U.S. is going through a bitter cold snap, and that also argues for higher prices.

But natural gas in storage is substantial. Natural gas inventories are currently 15% higher than a year ago, and 12% higher than the 5-year average. Those factors would argue for lower prices.

As with oil prices, I don’t think natural gas will see a sharp departure from 2023 prices. History argues that prices will likely be higher than they were a year ago, but I don’t think they will be sharply higher.

5. The energy sector will return at least 10%.

There are many predictions I could make for the year that won’t be resolved by the end of the year. For example, I think the world will set another record for carbon dioxide emissions. I think net energy exports from the U.S. will likely increase again. The U.S. will likely set another natural gas production record. But we won’t have the answers to those predictions when the year ends. So, I have to make a prediction that can be graded at year-end.

Last year I predicted that the energy sector would underperform. I didn’t feel like it could maintain the pace that resulted in the energy sector leading all other sectors in 2021 and 2022.

Energy was one of only three S&P 500 sectors that declined in 2023. But, based on my expectations for oil and natural gas prices, I expect the energy sector to have a modest, but perhaps not a great year.

The Energy Select Sector SPDR ETF (XLE) tracks an index of energy companies in the S&P 500. The XLE represents the stocks of large energy companies from different sub-sectors (e.g., integrated, oil production, equipment services). It is, therefore, a good benchmark for the overall energy sector. Some of the XLE’s biggest holdings are ExxonMobil, Chevron, ConocoPhillips, EOG Resources, and Schlumberger.

The XLE is the benchmark I will use to determine the validity of this prediction. The XLE is already down 4% since the year started, so it will have to gain around 15% or more before the end of the year for this prediction to come true. I think that’s a reasonable prediction.

As always, I will grade them at the end of the year.

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