Art by Valeria Petrone

2024 has been a tough year for energy investments—especially oil. Benchmark U.S. West Texas Intermediate crude oil has traded in a range of $60 to $80 per barrel for most of the year, a trend likely to continue. At an industry event in November, Rick Muncrief, CEO of shale producer Devon Energy Corp., told attendees he expects oil to trade in that range for the “foreseeable future,” as demand remains flat to negative.

Other parts of the energy mix—including liquified natural gas, nuclear power and renewables—are all more or less maintaining the status quo. If this continues through the end of the year, energy investors may close out 2024 feeling like they dealt with a lot of volatility just to end up muddling through. 2025 could bring a similar story.

Energy investors may have to get used to higher volatility, as conflicts in the Middle East continue and the global economy reworks its energy needs. Historically, wars, particularly in that region, have led to sharp increases in demand due to disruptions in supply. This was notably the case during the 1973 Yom Kippur War, which resulted in a near quadrupling of oil prices, and Russia’s 2022 invasion of Ukraine, when oil prices spiked significantly due to sanctions imposed on oil producer Russia  (they have since stabilized, even though the conflict continues).

Sources say the volatility could offer opportunities, but it will be important for investors to focus on quality and keep a close eye on risk.

Subdued Demand, Shaky Pricing

“We’re trading at pretty beaten-down levels here; pricing is at a level where it is not necessarily making money for producers, and the problem is multifold,” says Bob Yawger, at Mizuho Americas. “The biggest problem right now is Chinese demand destruction. China has been the source of demand growth for the past 10 years, and the slowing of their economy has cut demand by as much as 3% this year. So we’re looking at zero demand growth this year.”

Alongside this drop in demand, Yawger says, the U.S. is producing more oil than Saudi Arabia and Iraq—the two countries responsible for the majority of the Organization of Petroleum Exporting Countries’ oil production—combined. OPEC cut its overall production in response to lower demand during the COVID-19 pandemic and has maintained a lower rate of output. The group of countries has threatened a few times over the past few years to take to market the barrels they have in reserve, which would tank oil prices. It is unclear if they will keep the reserves off the market indefinitely. Even incremental increases in supply could have a significant impact on price, given how low demand is on a relative basis.

“The election also raises some questions,” Yawger adds. “If we see the tariffs on China, for example, that’s probably going to tank the market even further. If there is a big disruption to the global supply chain from tariffs, the Fed[eral Reserve] could be in a position where it has to raise rates again, and that’s going to have a negative impact on price.”

Jim Burkhard, vice president and head of research for oil markets, energy and mobility at S&P Global Commodity Insights, agrees.

“Some of this is structural: China’s economy is poor, and that’s impacting demand,” Burkhard says. “Chinese consumers are also buying electric vehicles at a higher rate, and that’s keeping demand low. As a result, we don’t expect much demand growth for gas or diesel going forward.”

Burkhard adds that even while the European Union works to transition away from dependence on Russian oil, success in that regard would not necessarily result in higher oil demand. Europe imports much of its oil from the U.S. now, but not at a level that will raise prices.

“If there is any region that is committed to decarbonizing its energy supply, it’s Europe,” Burkhard says. “European economies have also been under pressure, which is keeping demand low.”

For investors with significant energy exposure, these trends are likely to keep oil trading within its current range, both men say. While that may make things seem predictable on the surface, the difference in portfolio performance between $60 oil and $70 oil, for example, could be significant.

“You can still have a lot of volatility within a range,” Yawger says.

Curves Ahead

Looking ahead, getting a clear picture of oil demand specifically—or energy demand more broadly—may be challenging.

Nicholas Bohnsack, president of Strategas Securities, says the incoming administration of President-elect Donald Trump has indicated it would support land sales for oil and gas drilling and for further exploration. Producers might take advantage of that, but if pricing remains flat or goes down, it may not be worthwhile.

“We might see some growth if the incoming administration brings their ‘America First’ approach to domestic manufacturing—[and] if industrial power demand grows,” Bohnsack says. “We have that as a potential investment theme for 2025 and beyond, but a lot of it depends on policy.”

Additional uncertainty stems from the fact that industry may not stick with oil. Tech companies are putting a lot of money into artificial intelligence, which requires higher electricity use. In response, companies like Microsoft are considering supporting nuclear power as an arguably more sustainable source of power. But setting up nuclear power takes a long time and can be a fraught issue in many localities.

“We could see some movement on what falls in and out of favor, policy-wise,” Bohnsack says. “We’re generally bullish on nuclear over the long term, but there are a lot of ways for environmentalists and localities to challenge the development of nuclear power sites in court. So we will have to see how that shakes out. We have tracked bipartisan support within Congress to find solutions to the growing demand for power, so that could move things forward over time.”

Sources of renewable energy like wind and solar have also come down in price, and the technology needed to support the use of these renewables on the power grid has improved. As a result, renewables are competitive on a cost and use basis, which is likely to limit some demand for fossil fuels going forward.

“Solar, in particular, is, in many cases, the lowest-cost solution right now,” Burkhard says. “Texas is the biggest producer of wind energy in the U.S.”

Even if the incoming administration is more supportive of fossil fuels than that of President Joe Biden, the move into renewables may not slow down.

“Price is the biggest regulator in the energy market, and if these sources of power remain competitive, then you’re going to see demand evolve to incorporate more of these options,” Burkhard says.

Tags: Bob Yawger, China, Devon Energy Corp., energy, Iraq, Jim Burkhard, Mizuho Americas, Nicholas Bohnsack, oil and gas, OPEC, Renewable Energy, Rick Muncrief, Russia Ukraine, S&P Global Commodity Insights, Saudi Arabia, Strategas Securities