Energy Capex Rises

Domestic crude oil production, encompassing shale oil, has surpassed levels from both last year and the pre-pandemic era by high single digits as we approach the year-end. Concurrently, consumption has stabilized, maintaining proximity to the volumes observed in the previous year and pre-pandemic times. In the realm of natural gas, both production and consumption have exceeded the quantities seen in the past year and pre-pandemic norms.

Energy companies, in response to these dynamics, are poised for an extensive capital expenditure (capex) initiative. It marks a significant departure from the conservative investment approach adopted in the aftermath of the historic energy price plunge in 2020. The sector's rebound, fueled by higher energy prices as the economy reopened, has fortified its fundamentals, facilitating robust capex investments. We aggregated capex for the holdings of The Energy Select Sector SPDR® Fund (XLE); it is accelerating in the high teens year-over-year.

Notably, companies are redirecting investments to the Americas to mitigate costs and reduce geopolitical risks. A renewed focus has emerged on fortifying energy security and achieving greater independence. Not all capex spending will be on oil and gas, companies have also earmarked sums for low-carbon initiatives.

While this surge in capex is a noteworthy development, it is crucial to emphasize that it does not serve as an outright driver of energy prices. Forecasting energy prices remains a formidable challenge, with various external factors such as geopolitics and OPEC continuing to exert significant impacts on market dynamics. Nonetheless, we anticipate stabilization of supply and demand of energy into the next year.