Macro Intelligence: geopolitical tensions ignite the energy market

Article written by Juliette Saly (ausbiz)

Spotlight on the energy sector

In this week’s edition of IG Macro Intelligence, we take a look at the energy sector amid geopolitical risks.

Rising risk

One year on from the initial breakout of the Israel-Gaza conflict, the world remains on edge for a potential all-out war in the Middle East.

There has been a flurry of activity in the crude oil options market as Israel's Defence Minister declared all options were open for retaliation against Iran, following Tehran’s missile attack on 1 October.

WTI crude oil skew chart

Oil traders and hedge funds have reversed their bearish positions sparked by waning demand from China, turning the most bullish on crude options in two years, according to Bloomberg data.

Daily US crude oil chart

Brent crude oil has climbed above $80.oo a barrel, marking its highest price since August, as rising tensions spark concerns that Israel might target Iran’s oil infrastructure.

Goldman Sachs has indicated Brent crude oil could surge to the $90.00 a barrel level if Iran’s oil supply is disrupted, while US President Biden has called on Israel to consider options “other than striking oil fields.”

The Organisation of the Petroleum Exporting Countries (OPEC) claims to have enough spare capacity should Iran’s oil facilities be knocked out; however, the global oil supply could become imbalanced if Iran retaliates in a tit-for-tat strike in the Gulf.

Heating up

The S&P/ASX 200 enery sector (XEJ) is up almost 14% over the past four weeks, almost the same amount it has fallen over the past 12 months.

S&P/ASX energy market summary chart

AMP Economist Shane Oliver says the direction of the oil price and subsequent moves in the energy sector depend on Israel.

“If Israel’s response is proportional and focused on Iranian military facilities, then the oil price and shares will quickly settle down again, just as we saw after the exchange of missiles between Iran and Israel in April. This will be helped by Saudi Arabia raising production in December, Libyan oil production (1% of supply) resuming and rising non-OPEC production,” according to Oliver.

Louise Bedford from the Trading Game told ausbiz she sees technical signs the sector is cooling.

The other major factor is demand from the world’s number one oil importer, China.

According to the International Energy Agency, Chinese oil demand is currently firmly in contraction, falling by 1.7%, or 280,000 barrels per day, year-on-year (YoY) in July, a marked contrast with the 9.6% average pace of growth in 2023.

Chinese officials are attempting to boost economic activity through targeted stimulus measures, but sluggish growth and a switch to cleaner, lower-carbon fuels and electric vehicles (EVs) are dampening oil demand.

Energy plays

ASX Tradewatch data show investors see little reason to hold Santos shares at current levels, and should proceed with caution in buying into the recent rally in Woodside Energy shares.

Santos daily chart

Santos shares are down around 5% year-to-date, compared to the ASX 200’s 7.5% gain.

ASX Tradewatch data reveal shares are in a long-term bearish trend, with the 200-day moving average falling, showing demand for the stock is low.

Santos mean chart

However, Ord Minnett has just upgraded Santos to a BUY, with a price target of $8.40 and the median outlook on the stock is also a BUY according to Refinitiv data, with an average $8.20 price target. That suggests a gain of around 12.5% from current levels.

Woodside daily chart

Woodside Energy is Australia's largest independent dedicated oil and gas company.

Its shares appear to be in a strong near-term rally according to ASX Tradewatch trends.

However, it could be too soon to determine if it signals the start of a new long-term trend and the downward-sloping 200-day moving average indicates limited demand for this stock.

Woodside mean chart

The average recommendation on Woodside shares is a HOLD, according to Refinitiv data.

Ord Minnett rates the stock a HOLD with a $26.00 target price, while Citi group has a SELL with a price target of $23.24. Morgans recommends adding to the stock at these levels with a price target of $33.00.

Macquarie’s target price for Woodside is also $33.00, and the broker sees the stock outperforming as the producer keeps its cost controls in check, despite the inflationary environment.