Own ASX energy shares? Citi issues stark oil production warning

There's a whole lot of oil sitting in US Permian Basin shale deposits.

Key points
  • ASX energy shares benefiting from high oil prices
  • Demand continues to outpace supply
  • US oil producers are preparing major spending increases

ASX energy shares have been clear beneficiaries of energy prices trading at multi-year highs.

Take oil, for example.

You have to go back to 2014 to find West Texas Intermediate (WTI) crude oil trading at these levels.

WTI is currently fetching US$91.27 per barrel, down just a touch from yesterday's US$92.31 per barrel.

Now turn the clock back to 1 January and that same barrel was trading for US$75.21. And go back a full year, to 8 February 2021, and WTI was selling for $58.26 per barrel.

In other words, oil has surged 22% in 2022, helping propel some big gains for leading ASX energy shares.

S&P/ASX 200 Index (ASX: XJO) listed Santos Ltd (ASX: STO), as one example, has gained around 15% year-to-date.

Rival ASX 200 energy share Woodside Petroleum Limited (ASX: WPL) has done even better, up by more than 19%.

This, as the benchmark index itself has lost 5.3% in the calendar year.

But oil prices could be set for a significant retrace as the year unfolds.

A man in a suit looks sad as oil is spilled from a barrel.

Image source: Getty Images

Tailwinds ahead for ASX energy shares?

Crude oil prices have been driven higher as demand ramped back up following pandemic re-openings while new supply levels have failed to keep pace.

OPEC+, while opening the taps by another 400,000 barrels per day earlier this month, still has restrictions in place. And even so, many of its members aren't currently able to even meet their production caps.

New investments in oil exploration and production have also lagged, while COVID continues to hamper labour availability.

But there could be a flood of new crude oil supply hitting the markets in 2022 yet.

According to Citi analysts, output from the United States could lift by as much as 1 million barrels per day this year, which could pose concerns for ASX energy shares.

As Bloomberg reports, Citi said, "Oil executives tempted by the prospect of the highest crude prices in seven years are showing all the signs of abandoning pledges to hold the line on drilling budgets."

Citi analyst Scott Gruber expects US shale explorers will increase spending by some 40% in 2022. Citi had previously forecast a 30% increase in spending. Meanwhile, it expects overseas spending levels to increase by 32% this year, up from its previous expectation of a 17% rise.

According to Gruber:

E&P managements will be hard pressed to abandon their commitments. But we foresee an increasing number beginning to lean into the market as the challenge of managing supply in a market as disaggregated as the global oil market becomes increasingly clear.

Should the US pump an extra million barrels of oil per day, crude prices will likely retrace. And ASX energy shares could see their prices come under pressure.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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