Don't give up on the underperforming ASX oil & gas sector. Volatile crude prices and the unhinged supply and demand outlook for the commodity have weighed on our energy stocks, but the outlook is starting to improve.
It's not stimulus or falling interest rates that energy investors have to be grateful for – it's reports of the deflating US shale boom.
It's the flood of shale oil supply that has reshaped the world energy order, and in part at least, caused the S&P/ASX 200 Energy (Index:^AXEJ) (ASX:XEJ) index to fall behind with a more than 7% loss over the past year when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up by an equal amount.
The Oil Search Limited (ASX: OSH) share price and Origin Energy Ltd (ASX: ORG) share price contributed to the loss as they both slumped around 20% each over the period, while the Woodside Petroleum Limited (ASX: WPL) share price is trading flat.
The Santos Ltd (ASX: STO) share price is the standout as it rallied nearly 15% over the year as it got a boost from a failed takeover attempt for the group.
US shale running on empty
The sputtering of the US shale revolution could boost sentiment towards our ASX-listed energy stocks and has revealed the strategy behind oil cartel OPEC's and Russia's (affectionately referred to as OPEC+) strategy to cede market share to the new shale entrants.
Producers in the shale oil-rich Permian Basin in the US are cutting back on growth plans due to escalating costs and rapid well depletion, according to Bloomberg.
While shale represents a large and new resource for oil and gas, these unconventional wells rapidly run down by as much as 70% in the first year of production.
This means shale producers have to spend big on drilling new wells if they want to keep production growing and this meant that many of the smaller producers have never had the opportunity to become cash-flow positive.
Investors' patience is running thin and this is why the share prices of many smaller US-listed shale companies have collapsed in the past year.
Impact on ASX energy stocks
This isn't an unforeseeable event and it's probably why OPEC+ was willing to cut production of their conventional crude supply to support prices of the commodity. They knew (or suspected) that the shale party can't go on for long.
What's happening in the Permian will impact on the global sector and ASX energy stocks in two ways. First, it returns market power back to the cartel and friend, and secondly, it drives up the marginal cost of production for the industry.
In order words, the price floor for oil is probably higher than what it was before because costs for shale is increasing. This should lead to higher crude prices (and gas prices which lag behind crude) over the shorter term although the rise of the electric vehicle market still poses a significant headwind to oil and gas producers.
