Skip to main content

Global Energy - May Commentary

 

Jonathan Waghorn Portfolio Manager, Specialist Team

/

 

Will Riley Portfolio Manager, Specialist Team

This is a marketing communication. Please refer to the prospectus, supplement and KID/KIID for the Funds before making any final investment decisions. The value of this investment can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you invested.  

Past performance does not predict future returns. 

Spot oil prices have fallen by around 20% since the start of the year, driven by significant uncertainty around US President Trump’s economic policy and the likelihood of global GDP slowdown. Here, we consider the relationship between oil and GDP/recession, the likely reaction of US producers to lower prices, and the desire for OPEC to bring oil back to the market.

The oil futures curve has flattened since January, with the Brent spot oil price now trading around the low $60s per barrel, versus the low $70s at the start of the year. The five year forward Brent price has barely moved, remaining around the mid $60s, creating a futures curve that has moved from being in shallow backwardation to shallow contango.

The change in shape of the oil curve comes as the world digests month one of US President Trump’s new tariff policies. Being precise about the outcomes from here is of course a fool’s errand, but it is instructive to consider how oil demand tends to behave in periods of economic slowdown and recession, and also how short-cycle oil supply is likely to respond.

Unsurprisingly, there is a close positive correlation between the change in global GDP and change in global oil demand.

Global oil demand vs global GDP (quarterly since 1993)

Source: Morgan Stanley, April 2025

In the middle of April, the International Energy Agency (IEA) published an updated global oil demand forecast for 2025. The IEA reduced expected demand growth from 1.0m b/day to 0.7m b/day, driven by the International Monetary Fund’s (IMF) downgrade to global GDP, from 3.3% growth in 2025 to a lower forecast of 2.8%. Breaking this forecast down, the OECD region is now expected to see its oil consumption decline by 0.2m b/day, whilst the non-OECD region continues to see growth, up by 0.9m b/day.

Considering which end-markets are most affected by economic slowdown, and demand for petrochemicals tends to weaken the most in slowdowns as the consumption of durable goods falls. The response from diesel tends to be mixed: distillate used in the cyclical industrial sector is normally more GDP-sensitive, whilst end-uses such as road travel and maintenance tend to be more stable. At the other end of the spectrum, gasoline demand tends to be the least cyclical, as driving demand normally continues (excluding very large spikes in unemployment).

Looking more narrowly at the US economy, there have been four US recessions in the last 40 years. Three of these (1990/2008/2020) resulted in year-on-year oil demand decline at one point. The fourth (2000/01) saw oil demand stagnate for three quarters.


Change in global oil demand (yoy, m b/day) and US recessions

Source: Morgan Stanley, as of April 2025

It is notable that on most occasions, the period following economic recession saw a strong rebound in oil demand, often rising at an abnormally high rate and ‘compensating’ for the slowdown. Looking through each cycle, and a key factor is also the affordability of oil. With Brent trading at around $65/bl, the world is currently paying around 2.2% of GDP for its oil consumption. This makes oil cheap: around the lower end of the first quartile of affordability when measured over the last 50 years.

The world oil ‘bill’ as a percentage of world GDP

Source: Bloomberg; Guinness Global Investors, April 2025

In a world where global oil demand growth slows, we must also consider the supply response. And it tends to be shorter cycle oil supply, principally US shale oil, where the response comes first. There are various ways of cutting US shale economics, but one of the more useful, we think, is the approach taken by Morgan Stanley, which analysis the WTI oil price as a percentile of shale oil break-even prices:

WTI oil price expressed as percentile shale break-even (%)

Source: Morgan Stanley, April 2025

In other words, this analysis looks at the percentage of newly producing wells in the US that are losing money owing to the prevailing spot oil price driving a loss on the drilling project. And with the WTI price currently at just over $60/bl, over 25% of all recently drilled wells are losing money (NPV negative).  Since COVID, the 75th percentile break-even has proved to be a support for WTI prices, as it tends to coincide with production across the US shale system stagnating (versus prior expectations of US onshore supply growing by around 0.3m-0.4m b/day in 2025). A steeper decline sub $60/bl for WTI would bring production decline: something which US producer Diamondback Energy think is already happening, according to their latest results commentary.

This is all food for thought for Saudi Arabia, at the heart of OPEC+. In early May, the group confirmed their plan to bring 0.4m b/day of supply back into the market in both May and June. This implies the delivery of an additional 0.5m b/day of oil versus expectations at the start of the year. Saudi’s motivations are likely inward and outward-looking. Internally, Saudi Arabia needs to contend with OPEC+ politics: other nations in the group, especially Kazakhstan, the UAE and Iraq, are overproducing versus quotas, something Saudi Arabia wants to clamp down on. As a result, it is talking of its willingness to tolerate lower prices for longer, as a ‘shot across the bows’ of its OPEC+ partners. Externally, it will also be concerned about a loss of market share to non-OPEC suppliers, and may have to tolerate lower prices for a period to dampen supply from areas such as US shale. However, Saudi Arabia will be mindful of its own fiscal needs. Oil revenues accounted for around 60% of total budget revenues in 2024 (close to the average of the last 10 years), and its government continues to have one of the highest oil breakeven prices among its regional peers ($90+/bl). Without any remedial action on the spending side, the budget deficit could grow to around 7% of GDP. With likely spending and tax remedies, we expect the deficit to be smaller than this but still around 5% of GDP. Saudi Arabia can tolerate a lower oil price environment for a period, but in the longer term it has its eye on a significantly higher level.

At the end of April, we see energy equities discounting an oil price of around $63/bl, a little below the five-year oil futures price and well below our $80/bl long-term price forecast.

 

READ FULL COMMENTARY

Learn more about Guinness Global Energy

 

Guinness Asian Equity Income Webcast

Guinness Global Energy

 

Factsheets

Latest Factsheet

 

Guinness Global Energy Webcast

Guinness Global Energy - Webcast

 

The information provided on this page is for informational purposes only. While we believe it to be reliable, it may be inaccurate or incomplete. Any opinions stated are honestly held at the time of publication, but are not guaranteed and should therefore not be relied upon. This content should not be relied upon as financial advice or a recommendation to invest in the Funds or to buy or sell individual securities, nor does it constitute an offer for sale. Full details on Ongoing Charges Figures (OCFs) for all share classes are available here.

The Guinness Global Energy Funds invest in listed equities of companies engaged in the exploration, production and distribution of oil, gas and other energy sources. We believe that over the next twenty years the combined effects of population growth, developing world industrialisation and diminishing fossil fuel supplies will force energy prices higher and generate growing profits for energy companies. The Funds are actively managed and use the MSCI World  Energy Index as a comparator benchmark only.

For the avoidance of doubt, if you decide to invest, you will be buying units/shares in the Fund and will not be investing directly in the underlying assets of the Fund

Guinness Global Energy Fund

Documentation
The documentation needed to make an investment, including the Prospectus, the Key Information Document (KID) / Key Investor Information Document (KIID) and the Application Form, is available from the website www.guinnessgi.com, or free of charge from:

  • the Manager: Waystone Management Company (IE) Limited (Waystone IE), 2nd Floor 35 Shelbourne Road, Ballsbridge, Dublin DO4 A4E0; or,
  • the Promoter and Investment Manager: Guinness Asset Management Ltd, 18 Smith Square, London SW1P 3HZ.

Waystone IE is a company incorporated under the laws of Ireland having its registered office at 35 Shelbourne Rd, Ballsbridge, Dublin, D04 A4E0 Ireland, which is authorised by the Central Bank of Ireland, has appointed Guinness Asset Management Ltd as Investment Manager to this fund, and as Manager has the right to terminate the arrangements made for the marketing of funds in accordance with the UCITS Directive.

Investor Rights
A summary of investor rights in English, including collective redress mechanisms, is available here: https://www.waystone.com/waystone-policies/

Residency
In countries where the Funds are not registered for sale or in any other circumstances where their distribution is not authorised or is unlawful, the Funds should not be distributed to resident Retail Clients. NOTE: THIS INVESTMENT IS NOT FOR SALE TO U.S. PERSONS.

Structure & Regulation
The Fund is a sub-fund of Guinness Asset Management Funds PLC, an open-ended umbrella-type investment company, incorporated in Ireland and authorised and supervised by the Central Bank of Ireland, which operates under EU legislation. The Fund has been approved by the Financial Conduct Authority for sale in the UK. If you are in any doubt about the suitability of investing in the Fund, please consult your investment or other professional adviser.

WS Guinness Global Energy Fund

Documentation
The documentation needed to make an investment, including the Prospectus, the Key Investor Information Document (KIID) and the Application Form, is available in English from https://www.waystone.com/our-funds/waystone-fund-services-uk-limited/ or free of charge from:-

Waystone Management (UK) Limited, PO Box 389, Darlington DL1 9UF.

General enquiries: 0345 922 0044

E-Mail: iwtas-investorservices@waystone.com 

Waystone Management (UK) Limited is authorised and regulated by the Financial Conduct Authority.

Residency
In countries where the Fund is not registered for sale or in any other circumstances where its distribution is not authorised or is unlawful, the Fund should not be distributed to resident Retail Clients.

Structure & regulation
The Fund is an Authorised Unit Trust authorised by the Financial Conduct Authority.