What a record rebound in oil demand in 2021 means for ASX energy stocks

The ASX energy sector may represent one of the last value buys on the S&P/ASX 200 Index (Index:^AXJO) if oil demand stages a record bounce in 2021.

The bullish prediction was contained in the International Energy Agency’s monthly report released yesterday, according to Market Watch.

While the IEA is forecasting global demand for crude to plunge by 8.1 million barrels a day in 2020, demand next year will rebound by a record 5.7 million barrels a day.

One of the few value sectors left standing?

The economic shutdown forced upon us by the COVID-19 pandemic pushed demand for crude off a cliff – along with ASX oil-exposed stocks.

These stocks, such as the Woodside Petroleum Limited (ASX: WPL) share price and Oil Search Limited (ASX: OSH) share price, may have recovered some of their big losses since the March bear market low, but they are still underperforming the ASX 200.

In fact, they are also lagging behind ASX big bank stocks like Westpac Banking Corp (ASX: WBC) since the start of this fateful year.

The banking sector enjoyed a re-rating as bargain hunters rushed to buy the big banks. Oil stocks may represent a value play too if oil demand comes roaring back, like the IEA expects.

Oil demand recovering – somewhat

Early recovery in oil demand in parts of the world is giving hope to the bulls. China’s demand for the commodity in April is nearly back to what it was for the same month last year.

India also recorded an increase in May despite its big lock-down of its economy to stem the spread of the virus.

Meanwhile, OPEC and Russia’s agreement to extend production cuts through to July is also helping the recovery. The Brent oil price jumped to over US$40 a barrel from under US$20 a barrel in April.

Consolidating befor a recovery

If the tailwinds persist, the IEA believes the market will stabilise in the second half of 2020 before rebounding next year.

But it also warned that the recovery will be patchy with the pace and success of different countries in restarting their economies still looking highly uncertain.

I held a more downbeat outlook on the recovery prospects for the sector given the large stockpiles of crude and the fact that international air travel looks to be off the cards till 2021, at the earliest.

Foolish takeaway

The effective grounding of planes means a 3 million-barrel drop for the sector in 2020 before the IEA estimates a modest 1 million-barrel recovery in 2021.

I won’t be changing my underweight position in the sector despite the better than expected forecast from the IEA. But I think having a small exposure to the potential oil recovery (assuming the IEA is spot on – and that’s quite a big assumption) isn’t a bad idea.

But the stock I would be more drawn towards for the exposure to this thematic is oil and gas engineering group Worley Ltd (ASX: WOR).

It follows the saying that you are better off investing in the guys supplying the shovels during a mining boom than the miners themselves.

More reading

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• ASX 200 down 0.1%: Carsales update impresses, a2 Milk surges higher
• Is $1,000 invested in AGL Energy shares a smart investment?
• 3 reasons to buy ASX 200 shares right now
• 5 things to watch on the ASX 200 on Wednesday

Motley Fool contributor Brendon Lau owns shares of Westpac Banking and WorleyParsons Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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