Will there be an oil and natural gas supercycle in 2024?

Attribution: James Hill, CEO of MCF Energy

The great energy debate of 2023, to transition or expand, has a clear winner. The push toward an energy transition in which conventional energy was to be rapidly phased out and the use of renewables accelerated, did not amount to anything remotely significant, other than losses in investor portfolios last year. At the end of 2023, we saw a hefty dip in funds classified as “responsible investing,” reaching all-time lows, according to data from LSEG Lipper.

Renewables and clean energy have a place in our economic energy future, but what’s emerging is not an energy transition but rather, an energy expansion. By definition, an energy expansion is the integration of conventional and new energy sources, with oil and natural gas set to greatly power our world for the foreseeable future.

This is a far more suitable scenario for the current day for a few reasons.

The Clean Energy Landscape

Firstly, a significant amount of infrastructure must be built in order to support solar and wind-powered energy. Both Canada and the US are not even close to completing (or truly starting) the build out of new nation-wide grids. Take for example, at the end of 2023, we witnessed the approval of a wind farm and transmission line which was billed the largest clean energy project in US history. This may seem like significant progress but it should be noted that this project took 17+ years to make happen.

As grids are being built, they will need to be constructed thoughtfully. In a way that can handle transmitting a very large volume of energy. To electrify everything from cars to the broader economy, we will need at least double the clean power that’s available today.

At the point in time, in which we are able to ramp up clean energy production and efficiently transmit it, we will need to have figured out a way to store it for the long-term. Long duration storage solutions are currently being tested right now but as it stands we have no scalable solutions or enough of the critical materials needed to build an extensive number of them.

Finally, and probably the most important consideration to note, is that by 2030, population growth is anticipated to jump by more than one billion, taking us to 8.5 billion. To sustain this kind of growth, new energy sources must be added. There is no doubt about this. However, they need to be layered on top of, and not replace, traditional oil and gas. This is the only way we can actually meet the needs of our human population.

Investor Disclosure: To hold or sell?

2023 became the year of oil production in the US. Today, it’s the world’s leading producer. At the very same moment in time, it has declared ambitious climate goals. So what does this mean for investors?

According to recent research from JP Morgan, we are heading towards the start of the next energy supercycle. Their research states we are a far cry away from the oil price collapse of 2020 when Brent hit a low of $25.27. In September 2023, the benchmark for global oil markets hit a 10-month high of $97/bbl and predictions for 2024 estimate oil to hit $103/bbl.

A recent UN report finds the world is planning to double the amount of fossil fuel production over the next decade. From an investment standpoint, investing in oil and oil exploration remains a lucrative strategy, and this is not going to change any time soon. Based on the above insights, and simply because there is still an exceedingly high demand for oil, globally.

The European Energy Crisis

At the time of writing, over in Europe, we are witnessing what many are referring to as a stalemate between Russia and Ukraine. The climate has changed since last year and in the short-term, Europe holds enough energy supply to sustain itself. This is good news. What we need to be aware of is that Ukraine holds more of Europe’s natural gas supply than any other country. This could end up putting the EU in a precarious place if Russia makes any sudden and significant moves.

We must remember that the onset of Russia’s invasion of Ukraine led to an immediate and exasperated global energy crisis, and the current Israel-Hamas conflict caused oil prices to rise sharply by 7% within a single week despite no immediate threats to supply.

It’s going to be a pivotal year for Europe, and analysts and political figures like Germany’s Olaf Scholz are asserting that “the energy crisis isn’t over yet.”

Food for Thought

We’ve experienced moments in history just like this one where oil production was thought to have peaked, but then, for example, the shale revolution in 2008 unlocked previously inaccessible resources. From an investing standpoint, this did wonders for the portfolio.

Additionally, what cannot be ignored are the significant advancements that have been made within the natural gas industry. Machine learning and AI have come into the fold and reshaped it entirely. We are entering a new era of sustainable development. To borrow a line from Brian Mizell, “the entrepreneurial spirit in the space is pushing the boundaries of what is possible—and is now driving reductions in the carbon footprints of existing operations and assets.”

Oil and natural gas will continue to serve as a crucial cornerstone in powering the world, when the sun is not shining, and the wind is not blowing. Their significance in the world's energy mix remains vital, even as alternative energy forms are employed.