Key points
- ASX 200 energy shares have been boosted by rising oil prices
- OPEC may not be able to increase supplies enough to meet demand
- US shale oil producers are planning huge production increases
S&P/ASX 200 Index (ASX: XJO) energy shares like Santos Ltd (ASX: STO), Woodside Petroleum Limited (ASX: WPL) and Beach Energy Ltd (ASX: BPT) have been enjoying some welcome tailwinds from rocketing oil prices.
The index itself is up 0.25% in afternoon trading.
But buoyed by rocketing oil prices, the Santos share price is up 0.68%, the Woodside share price is up 0.65% and Beach Energy shares are up 1.70%.
With Brent crude oil soaring from US$77.80 at the start of 2022 to US$91.60 today, an almost 18% increase, these ASX 200 energy shares have also smashed the benchmark's year-to-date returns.
What's driving surging crude prices?
After falling off a cliff in the early months of the global pandemic, the oil price has been marching higher.
That's partly been due to a dearth of new investment in exploration and capacity expansion. Now, as the world reopens, energy demand is outpacing supply.
Then there's the Organization of Petroleum Exporting Countries and its partners (OPEC+). The cartel managed to drastically cut its combined oil output after the 2020 price crash. And it's only gradually lifting its production quota.
Yet even with the modest lifts in permitted capacity (see here for more), many of the member states aren't able to pump up to their quota levels.
Commenting on that situation, John Driscoll, director of JTD Energy Services said (quoted by Bloomberg), "Oil prices remain constructive on solid fundamentals. OPEC continues to fall short of its target, although it is promising to do better."
Throw in various geopolitical tensions in oil rich areas – from Russia and Ukraine to Libya and the United Arab Emirates – and you've got the perfect recipe for rising energy prices. And soaring ASX 200 energy shares.
And crude prices could head significantly higher yet. Goldman Sachs is forecasting US$100 per barrel.
But wait. Haven't we been here before?
How US producers could spoil the party for ASX 200 energy shares
If you have a look at the crude oil price charts in 2018, you'll see that Brent was steadily gaining and notched just over US$84 per barrel on 5 October. Then it cratered.
By 28 December 2018, that same barrel was trading for US$52. A loss of 38% in less than 3 months.
That drop wasn't due to a pandemic or any other major events impacting energy demand.
Rather it came as US shale producers, spurred by the high market prices, pumped record amounts of oil. At times this saw the US top Saudi Arabia as the world's number 1 oil producer. And for the first time in many decades, the world witnessed the US export its first oil shipments.
Now 2022 and 2023 could be shaping up in a similar way.
According to US oil giant ConocoPhillips, output from the oil rich Permian Basin is set to grow by a phenomenal 900,000 barrels per day (bpd) in 2022, far above the latest estimates from the Energy Information Administration.
As Bloomberg reports, ConocoPhillips CEO, Ryan Lance's forecast of a 900,000 bpd output lift points to "surprise announcements in recent days by Exxon Mobil Corp. and Chevron Corp. to aggressively ramp up Permian Basin production".
With West Texas Intermediate (WTI) crude also topping US$90 per barrel, the US shale industry is tipped to generate record cash flows in 2022.
Lance said he was caught off guard by Exxon's announcement this week that it intends to ramp up its Permian Basin output by 25%. Chevron is also opening the spigots wider, with a 10% increase on the cards.
That much new supply could certainly bring down the crude price and throw up some headwinds of ASX 200 energy shares.
"We were a bit surprised at the strength of some of the numbers that we were hearing," Lance said.
From an oil trader's perspective he added, "I'm absolutely concerned about. If you're not worried about it, you should be."
How these ASX 200 energy shares have been performing
With oil prices running hot so far in 2022, the Santos share price has gained 18%, the Beach Energy share price is up 19%, and Woodside shares have gained 19%.
This over a period that's seen the ASX 200 fall 5%.
