Oil and Gas Industry Trends: Q4 2024

Unsurprisingly, oil prices are taking a hit this quarter. Oil supply remains the top focus for investors. OPEC revised its plans, pushing the unwinding of its supply cuts out to April, but Morningstar remains skeptical it can keep this timetable. Near-term demand data is highly likely to influence OPEC’s decision. The US Energy Information Administration expects demand to significantly lag supply. Further oil price downside remains highly probable. We expect OPEC will extend its supply cuts past April, especially if the incoming Trump administration follows through on promises of tariffs and sanctions.

This article was adapted from the report Industry Pulse: Oil and Gas Q4 2024, written by the Morningstar Equity Research team. Download the full report for free.

Consolidation and productivity in the Permian drove a slight sequential decline in rig activity. However, activity in other basins more than offset production declines in the Permian. While there was a slight uptick in total production from the third quarter, we don’t see any catalysts to drive activity in the near term. Oil markets remain well supplied, with concerns about oversupply continuing to weigh on prices as geopolitical risks fade.

US gas producers remain challenged in the closing months of 2024 as low gas prices and unexpected productivity in basins like Appalachia dampened activity. However, we think the outlook for this resource is improving. Gas’ improved outlook doesn’t mean more drilling activity, though. Instead, we expect US gas producers to focus initially on previously shut-in wells or deferred wells for near-term production gains at minimal cost before adding rigs.

To meaningfully increase drilling activity, producers would need to see sustained higher gas prices driven by higher demand. We are watching for AI and data center demand to help the near-term 2025 domestic outlook and new US LNG export capacity to boost 2026 expectations. The futures market appears to agree. Henry Hub futures imply prices will pass $4 per million British thermal units when LNG spot prices begin to suffer at the end of 2025.

Weak demand globally has caused yet another delay in unwinding OPEC’s production cuts. Now, instead of unwinding over 2025, the organization is telegraphing a much longer period, from April 2025 through 2026. This addresses the core problem with OPEC’s prior strategy. Markets didn’t believe in a quick rebound to global economic activity that would allow for a rapid unwinding of the cuts. As a result, intense skepticism swirled around each expiration date.

By unwinding more slowly, much smaller supply growth reduces the impact on price. Even so, forecasters see non-OPEC supply growth exceeding global demand growth in 2025. Economic activity would have to accelerate, perhaps from greater stimulus in China, to allow OPEC to add back barrels without driving Brent lower. There are substantial reasons to doubt this. Potential tariffs and sanctions would hit the global economy hard and slow activity. This is likely why the cuts aren’t set to unwind until the end of Trump’s first 100 days. So, we’re uncertain whether OPEC will turn the taps back on in April.

Still, the OPEC we’re seeing on display is one we didn’t expect. This new plan communicates patience and a group willing to see a vision unfold over years rather than months. This type of plan requires substantial commitment from its members and stands in sharp relief to a group that went to war with Russia five years ago to seize market share.

Last quarter, the EIA anticipated deep and sustained inventory draws in the fourth quarter of 2024 and the first quarter of 2025. Current expectations show a surplus for the remainder of 2025. EIA forecasts demand to increase by about 1.2 million barrels per day in 2025. This increase is up from 2024 but still below the prepandemic average growth of 1.5 million barrels per day. Revisions by the EIA paint a bleak picture since it reduced demand forecasts by around 100,000 bbl/d. So, oil bulls face little reason for optimism given tough fundamentals in 2025.

The excess production implies global inventories will build by 500,000 bbl/d in 2025. Stockpiles, especially in the US, would be able to absorb this production if they chose to refill. Over 2024, the US Strategic Petroleum Reserve has been a marginal buyer, slowly refilling but still 300 million bbl below the predrawdown peak. Commercial stocks in the US remain similarly depleted. Refilling at current market prices may be unattractive as it would bolster oil prices when the new Trump administration wants lower gas prices and more economic activity. Moreover, refilling the SPR may be less of a focus given America’s net exporter status. China has been importing more crude, but much of this increase has been diverted to stockpiles reflecting its economic malaise.

We like HF Sinclair, ExxonMobil, SLB, and Hess. Download the free report for robust commentary and dashboards that explain why.

Other sections of the report include:

• Natural Gas and NGLs Overview
• EU Gas Storage Falls to Five-Year Average, Causing Concern for 2025 Restocking Season
• Slowdown in LNG Imports, but China’s Natural Gas Consumption Remains Robust in First Nine Months of 2024

Solar and storage continue to shine as policy uncertainty looms. Solar capacity additions rose 41% year on year in the third quarter of 2024, up to 4.5 gigawatts. Full-year capacity additions appear on track to set a new record for solar installations in the United States. Solar benefits from falling costs, ease of installation, and zero carbon emissions.

Battery storage capacity additions continue to experience robust growth—the third quarter of 2024 saw a 3% increase on last year’s same quarter. The highlight is the US Energy Information Administration’s 6.5GW expectation for the fourth quarter of 2024. This forecast is a 179% increase from 2023’s fourth quarter. But policy uncertainty looms following the US Election.

US president-elect Donald Trump has publicly stated a desire to repeal the Inflation Reduction Act, which includes a bevy of clean energy incentives. We see a full repeal as highly unlikely but believe a partial one is realistic. Changes could include accelerating the phaseout of renewable energy tax credits or lowering the credit amount, or both. We expect this uncertainty to likely drive an acceleration in buildout in the near term as projects look to get ahead of any policy changes. We view the likes of First Solar as among the most immune to policy changes given its focus on reshoring.

In the longer term, we see continued investment in renewable energy to meet rising electricity demand and carbon goals despite any policy changes.

Renewable energy is covered by Morningstar analysts in a different report. Download the free US Renewable Energy Pulse for Q4 2024 here.