An oil pumpjack pulls oil from the Permian Basin oil field in Odessa, Texas.
Joe Raedle/Getty Images
Oil prices have fallen 10% this month, and stocks have been sinking with them. In fact, shares of energy stocks in the S&P 500 are down 22% since their recent peak on June 8.
On Friday, prices got a small bump, but not nearly enough to reverse the recent trend. West Texas Intermediate crude, the U.S. benchmark, was up 1.3% to $105.63 per barrel.
Over the past year, oil has ridden a supply-demand imbalance to enormous gains. But some of the dynamics that led to those gains are changing. Oil supplies are still relatively low around the world, with much less oil in storage than the five-year average. But demand is now starting to drop in various places because of the high prices. In the U.S., gasoline demand has been lower than usual for this time of year, and prices have been coming down. On Friday, the average price in the U.S. was 4.93 per gallon, down from $5 a week ago.
“Oil prices might be peaking,” Yardeni Research said in a note on Friday. “The best cure for high oil prices is high oil prices. They are boosting production, while weighing on demand.”
U.S. producers have been ramping up drilling, with production rising to 12.1 million barrels per day last week, up from 11.9 in April. And Americans are using about 20 million barrels of petroleum products a day, a level that’s stayed flat for much of the year.
Citi analyst Scott Gruber thinks that the stocks are stalled out, and that investors should be careful with them now. The problem is that high oil prices are now considered a recession risk, so if crude moves higher, the stocks may not move as much with it, Gruber predicts.
“Indeed, the stocks may bounce initially given the recent pullback but any material move higher in crude likely is coupled with heightened fears toward the resulting economic impact and potential pullback shortly thereafter,” he writes.
Citi has been more bearish than other banks on oil—other analysts still see upside for oil prices and the industry. But Gruber is urging investors to be choosy, looking for stocks with exposure to specific positive catalysts.
One of those catalysts is a tax incentive for carbon capture, a process used by some companies to capture emissions before they are released into the atmosphere. Three companies that can benefit from a possible congressional extension of the incentive are Denbury ( DEN
), California Resources (CRC), and Occidental Petroleum (OXY). Denbury could also be attractive as a takeover target, Gruber writes.
Other stocks are also positioned to rise despite the larger pressures on the industry. EOG Resources (EOG) is “our preferred name among the large-cap shale stocks on valuation, a firm cash return framework and an advantaged gas play in Dorado,” he writes. Gruber also likes Ovintiv ( OVV
) and EQT (EQT) “under a bounce scenario for the group given FCF yield and cash return potential.”
Write to Avi Salzman at [email protected]
