Energy index tops sector leaderboards as oil nears 8-year highs

Oil prices posted a fourth consecutive weekly gain last Friday, trading near 8-year highs of around US$84 a barrel.

The S&P/ASX Energy Index has topped the sector leaderboards, up 5.6% year-to-date and well ahead of other winning sectors such as materials and utilities. 

Almost two years ago, a historic production cut was put in place by OPEC to help the energy market as the pandemic gripped the world’s economies. 

Global oil consumption is expected to rebound back to pre-pandemic levels in 2022. However, bringing back output is easier said than done.

Members of the petroleum organisation have routinely missed their monthly production targets. According to the US Energy Information Agency, OPEC countries averaged 26.3m barrels a day (b/d) in 2021, down from the average 29.9m b/d in 2019. 

The EIA does not expect OPEC to surpass pre-pandemic figures until at least 2024. 

The US (world’s largest non-OPEC producer) averaged 11.2m b/d in 2021 and is expected to return to pre-covid levels by 2023. 

$100 oil in play? 

JP Morgan forecasts oil prices to rise as high as US$125 a barrel this year and push even further to US$150 a barrel in 2023, according to Reuters.

“We see growing market recognition of global underinvestment in supply,” said the bank. 

The Australian Government’s commodity forecaster, the Office of the Chief Economist (OCE), has a far more grounded price target for oil. 

The OCE expects Brent prices to average US$73 a barrel in 2022, citing a lift in output from the US and OPEC to put downward pressure on prices.

Plenty of upside for ASX players

The consensus for large cap ASX energy stocks including Woodside Petrol (ASX: WPL), Santos (ASX: STO) and Beach Energy (ASX: BPT) is a Strong Buy.

Santos has been viewed as the stock with the most upside with a consensus price target of $8.6 (22% upside).