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Don’t sweat windfall taxes – energy stocks will soon soar


Ken Fisher founded Fisher Investments and built a fortune estimated at $6.3bn. He writes a monthly column for Telegraph Money 

Don’t let the FTSE 100’s flat start to the year blind you. This beautiful, global bull market is strong, an early advance on the good-to-great 2024 I foresee. But then, there is energy.

The sector’s lack of energy partly explains UK stocks’ tepid start, while the bears claim Britain’s extended “windfall tax” on gas and oil portends worse ahead. Wrong! The energy sector should shift from laggard to leader later this year – shocking almost everyone. Here’s why.

After energy outperformed in 2022, riding the crest of spiked oil prices as Putin invaded Ukraine, most envisaged ongoing global supply shortages, stoked by OPEC+ supply constraints, falling UK production and a reaccelerating, post-Covid China. These, supposedly, would send oil prices spiking again – powering up energy companies.

So, few people expected energy stocks’ weakness in 2023. Globally, they fell 3.3pc while world stocks soared 16.8pc. Yes, UK Energy’s 10.8pc rise beat the overall 7.7pc increase made by British shares, but that was globally an outlier, partly due to liquefied natural gas (LNG) arbitrage profits. Globally, energy investors got trounced in 2023.

By early 2023, oil prices had quietly fallen fully a third from March 2022’s high. Global production obliterated shortage fears and seemed set to keep expanding in Norway, Guyana and North America.

President Biden’s temporary ban on new federal land leases didn’t bite – US output actually topped record highs. Hence, high and rising production globally constrained oil prices to between $70 and $95 per barrel, stymieing global energy firms, whose profits chiefly rise and fall with crude prices.

Now everyone, again wrongly, extrapolates this lag throughout 2024. Fund flows, money manager surveys and valuations all show that investors have slashed exposure to the energy sector. This sour sentiment shift goes against the fundamentals. Oil prices should rise later this year, refuelling energy firm profits – and pumping share prices.

Why? It isn’t OPEC+ production cuts.

Energy stocks and oil prices baked those in long ago. They are mere symbolism now – not real-world limits. Ditto for Mr Biden’s pausing of new LNG export terminal permits, which won’t stop already permitted and under-construction terminals from easily supplying the planet. North American LNG export capacity should double later this decade.

Nor is it the gradual decline in UK and North Sea output, this is old, widely known news.

No, this is about simple incentives and normal market behaviour.

When energy companies saw higher prices, they boosted production to capitalise. Now US producers are completing wells far faster than drilling new ones, running down America’s “fracklog” of drilled-but-uncompleted wells.

Down 17.9pc year on year, the dwindling fracklog means less inventory can come online quickly. The low-hanging fruit are picked.

But producers aren’t replacing them. Dissuaded by mostly low-end prices and higher borrowing costs, oil producers got lean. Now, after years of consolidation, global mega-drillers dominate the market. With their more judicious production targets reigning, US rig counts fell from 621 at the end of 2022 to the current 506. US drilled wells fell, down 18.6pc year on year through January.

Production typically lags drilled wells by about six months, so soon overall production will slow significantly.

Meanwhile, many people vastly underestimate demand, while at the same time overemphasising areas of minor economic weakness like Germany and the UK. Yet better-than-expected growth in Britain and Europe, solid growth in America and stable demand in China will result in stronger-than-forecast oil demand.

For that reason, oil prices will climb.

Not sky-high, but challenging the upper end of 2023’s range – boosting energy sector earnings and the FTSE. It is the oil price, not production volume, that drives profits and oil stocks and determines when and whether companies will recoup high drilling and exploration costs. Higher oil prices, married with cost-consciousness, should create an earnings bonanza.

This should help big global oil companies, Britain’s energy stocks and the FTSE, as they benefit from strong balance sheets, low-cost production and integrated business models. They are best positioned to capitalise when oil prices rise but don’t skyrocket.

Don’t sweat Jeremy Hunt’s new Budget, which extends oil and gas “windfall” taxes. These taxes won’t tank Britain’s energy stocks.

These taxes impact domestic production and revenue only. Given just 13.8pc of UK energy company revenue is actually from Britain, windfall tax…



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