The Oil Price Outlook Is Good for Energy Companies

Key Points

• The outlook for oil prices in 2025 is too low, setting the sector up for an outperformance and upgrade cycle. 
• The market for energy stocks pulled back sharply at the end of 2024 and offered an attractive buying opportunity in January. 
• Stocks like Exxon Mobil trade at a deep discount to the S&P 500 and pay high yields while buying back stock and reducing their share count. 

The oil price outlook is good for energy companies because it is depressed, averaging a long-term low for Q4 and at an extreme level likely to increase as the year progresses. This means the outlook for energy company earnings is likely too low and that an outperformance/upgrade cycle is about to unfold. Based on the consensus figures for energy sector earnings, the rebound in sentiment and stock prices could be vigorous.

The early-January consensus of 3.5% is down 650 basis points from the peak in mid-2024, making the Energy Sector NYSEARCA: XLE the weakest regarding 2025 earnings growth and the most downgraded sector in the S&P 500. 

The Forecast for Oil Prices in 2025 Is Too Low

The latest forecasts have a WTI average in the low-$70s and as low as $69 for the year. The latest price action in WTI has the spot price moving higher, confirming the price floor in place since 2021. That floor is in the $69 to $72 range; oil prices will have to move lower to reach that level, and the odds are decreasing that it will.

GDP growth is solid and expected to remain solid, and there are tailwinds in the form of administrative policy and economic stimulus that will lead to better-than-forecast results, all supportive of oil prices. U.S. GDP is expected to hold steady at a moderate 2.5% in 2025, while globally, GDP will accelerate to roughly 3.5% and possibly as high as 4%, led by the emerging markets. 

The tailwinds of Trump's administrative policy and economic stimulus in China will also support the energy demand. China adopted numerous policies intended to spur growth late in 2024, including plans for increased bond funding and wage increases for many of its workers. The bond funding will be used for long-term equipment upgrades and capital improvement, while increased wages will boost consumption, which is good news for oil prices.

Regarding Trump’s policies, the demand boost will be offset by increasing production, but it will be sufficient in this scenario to keep the price floor in place.

Regarding OPEC, the cartel is unlikely to increase its production in 2025 and will likely keep production restraints in place to benefit from higher prices. It, too, is set up for an upgrade cycle after lowering its demand outlook for 2025 at the end of last year. 

Exxon Mobil Corporation Is the Leading Play in Diversified Energy

Exxon Mobil NYSE: XOM is the leading player among diversified energy companies and the largest integrated energy company outside China; it is also a high-yield stock trading at a deep discount to the S&P 500 NYSEARCA: SPY. It is forecasted to produce a revenue decline in 2025 but to widen the margin, which is critical to the capital return outlook. Not only is Exxon’s revenue forecast likely too low, setting it up to outperform in 2025, but its robust capital return is safe. 

Exxon stock yields more than 3.6%, with share prices near $105. The payment is less than 50% of the 2025 earnings outlook, growing annually at a low-single-digit CAGR and compounded by share repurchases. The share count is up at the end of FQ3 2024 because of the all-stock acquisition of Pioneer but falling every quarter, and buyback activity is ramping higher. Buybacks in Q3 topped $13.8 billion, up 5.7% from the last year, and are expected to remain strong in calendar 2025. 

Exxon stock is trending higher despite the lack of traction in 2023 and 2024. The uptrend is marked by price dips in mid-2022, early 2024, and early 2025, which show rising support among long-term investors. That support is echoed in the analysts' sentiment data, which shows a moderate conviction in the Moderate Buy rating and $128.74 price target.

The consensus reported by MarketBeat is down marginally over the past few months, but most targets issued in December 2024 range from $120 to $140, offering a 12% to 30% upside for investors. A move to $120 aligns with recent highs and puts this market in a position to hit new highs.