Oil could head towards $150 a barrel. This may not be good for the economy, but it would be great news for energy stocks.
Crude prices had been under pressure since their peak in March, as investors worried about the impact of China’s lockdown on global growth and a possible recession in the United States. But after being knocked down to $94.29 on April 11, the price of oil rose steadily, while making higher highs and lower lows.
That didn’t change last week, when the price of oil rose 3.3%, a week that might have been the last best chance to avoid another oil bust. The reason: the Organization of the Petroleum Exporting Countries has announced that it will increase its production targets to 684,000 barrels per day, against 432,000 currently. It was an acknowledgment that, given the combination of sanctions on Russia and China lifting its Covid-19 restrictions, more oil was needed to prevent demand from far exceeding supply.
Still, that’s probably not enough, says Helima Croft, head of global commodities strategy at RBC Capital Markets. “We think too much of a burden is probably placed on OPEC to offset the economic damage caused by a war involving the global commodity hypermarket,” she said.
It didn’t help that the European Union announced a limited embargo on Russian oil as US oil inventories fell by 5.07 million barrels, far more than the expected drop of 1.35 million. Oil is now trading above $116 a barrel, its highest price since March. That leaves West Texas Intermediate crude, the US benchmark, set to break the 52-week high of $123.70 hit on March 8. “You can’t stop crude; you can only hope to contain the damage the run to $150 will wreak on the market and the economy(s),” writes Rich Ross, Head of Technical Analysis at Evercore ISI.
Oil exploration stocks, in particular, should benefit. Truistic analyst Neal Dingmann notes that six quarters at this level would mean that some of them would have so much free cash flow that they would be able to return more than 80% of their market capitalization to shareholders via buyouts. shares and dividend payments.
(symbol: CPE) would be able to return 86% of its market capitalization, or $3.1 billion;
(SBOW) could bring in 72%, or $620 million;
(MUR) could fetch 69%, or $4.7 billion;
(OVV) could bring in 67%, or $9.8 billion; and
(ROCC) could bring in 65%, or $1.2 billion.
Dingmann is aware of the caveats in his analysis that high oil prices could lead to demand destruction that would cause prices to fall, while the cost of drilling would likely rise. Yet, as long as oil prices can rise, the case for oil stocks remains strong. He is a fan of Ranger Oil, which provided an update to its record last week. “Given our [free cash flow] estimates, we expect the company to work quickly on its current buyout authorization and potentially increase the program, while also launching a dividend program in Q3 2022 and continuing to target deals,” he wrote.
As they always say: Follow the money.
Write to Ben Levisohn at [email protected]