Something unusual has been happening during this early start to the fourth quarter: crude oil and energy company stock prices have all risen pretty soundly.
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NYMEX crude prices have been rising of late (although closing lower Wednesday following EIA data), up as high as $49.71 Wednesday morning, the highest in 2.5 months. Oil was up for a fourth session, the longest stretch of gains since April, on expectations for tighter supplies and increased demand, and with some help from a weaker dollar.
This is also a very welcome change for the energy sector as it is up nearly 9% this quarter, demonstrably better than its performance in 3Q, when the sector was down over 18%.
As a result, energy stocks have been rallying this quarter as investors appear to be looking for bargains among last quarter’s most beaten-down names.
Included in the rally are energy players such as Marathon Oil (MRO), Hess Corp. (HES), Conocophillips (COP) and Chevron (CVX), all of which have generated very strong gains thus far for this quarter. Behemoth Exxon Mobil (XOM) hasn’t fared as well, but the stock is still up around 6% thus far.
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So, what might be some of the reasons why oil is getting “pumped up” these days?
“The recent price rise partly reflects evidence of output declines in the U.S., and though we still have to watch production and inventory data to gauge trends, it’s only a matter of time before we get supply and demand balance around a marginal production cost that is likely to be somewhere in the above range,” Mike Englund, Principal Director and Chief Economist for Action Economics said.
Pavel Molchanov, equity analyst at Raymond James noted: “the recent bounce in crude is a function of increased chatter about OPEC policy; escalation of fighting in Syria; and generally bolstered economic optimism.”
Regarding oil prices, Molchanov states that “because current oil prices do not generate acceptable drilling economics in the vast majority of non-OPEC geographies, the price environment will eventually have to recover to support a more sustainable level of industrywide investment.”
Englund says his group generally assumes that WTI will trade in the $40-$55 range for the foreseeable future until we have a shake-out of high-cost producers from the production process.
Price advances for crude and energy stocks prices might also be in a favorable position as global oil demand in 2016 is expected to increase at its fastest pace in six years, according to the EIA.
Molchanov can see crude going in either direction depending on certain specific circumstances.
“Several wildcards remain in play,” he opines, such as: “on the bullish side, the possibility of supply disruptions above and beyond the outages in Libya; and on the bearish side, the prospect of a stronger than expected post-sanctions recovery of exports from Iran.”