OPEC's latest Oil Market Report painted a bearish picture for the Oil/Energy sector, as the cartel cut its growth forecast for global oil demand for the second consecutive month. OPEC now expects demand to grow by 2.03 million barrels per day (bpd) in 2024, down from its previous estimate of 2.11 million bpd. The forecast for 2025 was also reduced to 1.74 million bpd, down from 1.78 million bpd. Despite expectations of healthy demand from sectors like air travel and non-OECD countries, concerns about sluggish growth in China and increasing competition from alternative energy sources weighed on the projections.
Following the release of the report, energy stocks experienced significant losses as oil prices fell sharply. The Energy Select Sector SPDR, a key indicator of the largest U.S. energy companies, dropped by 1.7% on Tuesday. Among the hardest hit were Diamondback Energy FANG, APA Corporation (CVX) and ExxonMobil (XOMCVX), with shares of each plunging around 4%. The OPEC report sparked widespread selling in the energy sector, reflecting market fears of prolonged price weakness. On the New York Mercantile Exchange, WTI crude futures lost $2.96 (or 4.3%) to close at $65.75 a barrel on Tuesday — the lowest in more than two years.
Factors Behind OPEC’s Projections
OPEC's cautious outlook stems from a combination of demand-side and supply-side pressures. A key factor is the continued softness in China's economic performance, which has not only affected its crude imports but also raised concerns over a potential long-term demand decline, exacerbated by the rise of electric vehicles. Additionally, OPEC has adjusted its demand outlook due to the increasing penetration of LNG trucks and electric vehicles, particularly in non-OECD countries.
On the supply side, OPEC noted the rising production from non-OPEC+ nations like the United States, which is expected to contribute an additional 1.2 million bpd in 2024 and 1.1 million bpd in 2025. The anticipated supply growth from these countries, combined with OPEC+’s own production adjustments, is likely to maintain a cap on price gains.
OPEC Vs. Other Reports
While OPEC remains moderately optimistic about a potential demand rebound driven by non-OECD countries, other agencies like the International Energy Agency (“IEA”) and U.S. Energy Information Administration (“EIA”) offer a more conservative outlook. The IEA, set to release its own report, has previously forecasted a surplus in 2025, a view that contrasts with OPEC's marginally bullish expectations for demand recovery in key economies such as India and Russia.
Impact on Energy Stocks
Looking forward, OPEC maintains that while downside risks prevail, momentum from non-OECD economies could support a modest recovery in global demand. However, the current market sentiment remains fragile, largely driven by concerns over China's economic slowdown and global supply surpluses.
For companies like Diamondback Energy, APA Corporation and ExxonMobil, the continued weakness in oil prices poses a direct threat to their revenue streams and profitability. A prolonged period of low prices could lead to reduced capital expenditures, pressure on margins, and a potential reevaluation of production targets. As these Zacks Rank #3 (Hold) companies are closely tied to the trajectory of oil prices, their stock performance is vulnerable to further declines should OPEC’s projections of tepid demand growth materialize.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Conclusion: A Cautious Optimism
Despite the headwinds, a positive outlook for oil cannot be entirely dismissed. The possibility of stronger economic growth in non-OECD nations, combined with potential production cuts or supply adjustments by OPEC+, could help stabilize prices in the medium term. As market dynamics evolve, the energy sector may still find support from strategic shifts and policy interventions aimed at balancing supply and demand, offering a cautious yet hopeful outlook for investors in the space.
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