Good start to the year for oil prices. After a rather muted trading range in 2H-2024, Brent crude oil prices have moved up sharply in recent days to above USD80/bbl, largely driven by the increasing risk of tighter sanctions on countries like Russia and Iran under the upcoming Trump administration. It is speculated that new sanctions on Russia’s oil industry could range much wider than before and will specifically target tankers, traders, and ship insurers that move Russian oil. This could severely disrupt Russian oil exports to China and India, the biggest buyers of Russian oil. Russia exports around 4-5mmbpd of oil currently. In addition, the unofficial flows of oil from Iran to China may also face tighter scrutiny under the new US President. Without these developments, we expect Brent crude oil prices to rangebound at USD70-75/bbl in the near to medium term, with strong downside support at USD70/bbl. Given these uncertainties, upside risks are outweighing any potential demand concerns within the market. Upstream exploration & production (E&P) players are thus well-positioned to ride on this.
Gas focused players also stand to gain from higher export potential. Gas price benchmarks are holding up better than earlier expected. With a colder winter in Europe and pipeline outages in Ukraine, spot liquefied natural gas (LNG) prices in Europe and Asia hover in the mid-teens in recent weeks, with 2024 averages coming in at the higher end of our forecast range. Henry Hub prices have also recovered from the lows earlier in 2024 on the back of tighter supplies. Given that the ban on export terminals may be lifted under a Trump administration, increased exports should be beneficial for shale gas producers, both from a volume and price perspective. If consolidation in the shale gas space continues, after the Chesapeake-Southwestern deal last year, optimism in the sector is likely to increase further.
Trump trade is driving the resurgence of US upstream oil & gas players. Share prices of US upstream oil & gas players have rebounded by c.15% on average over the last month, ahead of President Trump’s inauguration next week. The rerating momentum started even before the recent rally in oil prices, demonstrating investors’ confidence in this sector as a key beneficiary of the new administration’s pro-fossil fuel stance. While “drill baby drill” as a rallying call sounds ominous from a supply perspective, US shale oil & gas production rely more on market factors rather than politics, and we believe that the focus on capital discipline, efficiency gains, and free cash flows are set to continue, driving returns for shareholders in 2025.
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