What You Need To Know
According to energy research company Wood Mackenzie, global oil demand is expected to increase by 1.9 million barrels per day (bpd) this year. This prediction aligns closely with the estimated growth by the Organisation of the Petroleum Exporting Countries (OPEC) for 2024. The majority of this increase is projected to come from China and India, as is commonly forecasted by industry experts.
Forecasts for oil demand growth in 2024 vary significantly, reflecting conflicting views on the speed of the transition from fossil fuels. OPEC anticipates continued growth in oil usage over the next two decades, while the International Energy Agency (IEA), representing industrialized countries, predicts that demand will peak by 2030.
OPEC+ has implemented production cuts since late 2022 to support the market as non-member producers, including the United States, have increased output. In November, OPEC+ agreed to voluntary output cuts of about 2.2 million bpd for the first quarter and is considering extending them into the second quarter and potentially throughout the year. Despite this decision, Wood Mackenzie's Alan Gelder believes that members will need to increase volumes in 2024 to balance the market.
While rising geopolitical tensions have supported oil prices this year, concerns about economic growth and high interest rates in Western economies have acted as counterweights.
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Why This Is Important for Retail Investors
Understanding global oil demand trends can provide retail investors with valuable insights into the overall health and stability of the energy sector as well as the broader economy. It helps investors gauge market conditions and make informed decisions regarding their oil-related investments.
Oil demand growth in emerging markets like China and India indicates expanding economies and increasing energy consumption, which can present potential investment opportunities for retail investors. They can identify companies operating in these regions that may benefit from the growing demand for oil and related products.
Diverging forecasts for oil demand growth in 2024 reflect the ongoing debate surrounding the future of fossil fuels. Retail investors can use this information to assess the shortand long-term viability of oil investments and adjust their portfolios accordingly to align with their personal investment strategies and risk appetite.
Monitoring OPEC's and the IEA's outlook on oil demand can provide retail investors with a comprehensive understanding of the industry's future trajectory. By considering these expert opinions, investors can gain insights into potential market shifts, regulatory changes, and geopolitical factors that may impact oil prices and investment opportunities.
The impact of output cuts implemented by OPEC+ on oil prices is vital for retail investors. Understanding the potential extension of these cuts offers insights into price stability and supply dynamics. This knowledge can help investors determine the potential profitability of their oil investments and make informed decisions based on various scenarios.
How Can You Use This Information?
Here are some of the investing ideas that can be explored using this information:
Value Investing
Retail investors can identify undervalued companies in the energy sector, considering the projected growth in global oil demand and potential investment opportunities in emerging markets like China and India.
Value investing searches for undervalued companies that trade for less than their intrinsic values, with the expectation that they will eventually be recognized by the market.
Dividend Investing
Investors can explore energy companies with a history of stable dividend payments, taking into account the projected rise in oil demand and the potential for increased profitability.
Oil majors often stand out as attractive investment options for retail investors, particularly because of their history of providing consistent and competitive dividend payouts. These companies, known for their substantial operations in exploration, production, refining, and marketing of oil and gas, have a reputation for generating steady cash flows, enabling them to reward shareholders with dividends.
Among the oil majors renowned for their robust dividend policies, Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX), and Shell (NYSE: SHEL) stand out as prime examples, attracting retail investors with their consistent dividend payouts.
Dividend investing targets companies that regularly distribute a portion of their earnings to shareholders as dividends.
Defensive investing
With the conflicting forecasts for oil demand, retail investors may consider adopting a defensive strategy by investing in energy companies with diversified portfolios or a focus on stable sectors, to mitigate potential risks associated with fluctuations in demand.
Defensive Investing focuses on securing a portfolio by choosing companies that are less sensitive to economic downturns.
Sector Rotation
The projected rise in global oil demand suggests opportunities for retail investors to rotate their investments into energy-related sectors to capitalize on potential growth. They can consider reallocating funds into sectors like oil exploration, transportation, and renewable energy.
Sector Rotation is the practice of shifting investment capital from one industry sector to another to take advantage of the economic cycle.
Geographic Diversification
Considering the expected growth in oil demand in emerging markets like China and India, retail investors can explore geographic diversification. They may consider investing in energy companies with significant operations or presence in these regions to potentially benefit from their expanding energy markets.
Geographic Diversification expands a portfolio's reach by investing in assets across different regions to mitigate the risk associated with any single country.
Read What Others Are Saying
Reuters: Global oil demand to grow by 1.9 mln bpd in 2024, says Wood Mac
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Popular ETFs
Some investors prefer to invest in stocks via an exchange-traded fund for ease and reduced risk. Exploring investments in the oil and gas sector can offer diversification and potential growth opportunities for retail investors in the U.S. and Canada. Exchange-Traded Funds (ETFs) are a popular choice for gaining exposure to this industry, as they provide the ease of trading like stocks while offering a basket of assets for reduced risk.
Here are several oil and gas-related ETFs that investors might consider:
Energy Select Sector SPDR Fund (XLE): This ETF aims to provide investment results that correspond generally to the price and yield performance of the Energy Select Sector Index. It offers exposure to companies in the oil, gas, and consumable fuel sector, along with energy equipment and services.
Vanguard Energy ETF (VDE): With the goal of tracking the performance of the MSCI US Investable Market Energy 25/50 Index, this ETF invests in a wide range of U.S. energy stocks. It encompasses companies involved in the exploration and production of energy products, such as oil and gas.
United States Oil Fund (USO): This ETF is designed to track the daily price movements of West Texas Intermediate (WTI) light, sweet crude oil. It offers direct exposure to the oil price, making it a straightforward option for investors looking to invest specifically in crude oil.
iShares U.S. Oil & Gas Exploration & Production ETF (IEO): This ETF seeks to track the investment results of an index composed of U.S. equities in the oil and gas exploration and production sector. It is suitable for investors looking to focus on the upstream segment of the oil and gas industry.
SPDR S&P Oil & Gas Equipment & Services ETF (XES): This ETF aims to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Oil & Gas Equipment & Services Select Industry Index. It targets companies providing equipment and services for the exploration and production of oil and gas.