Is it too late to invest in the oil price rally?

Is it too late to invest in the oil price rally?

The oil market is currently going through one of the most turbulent periods since the infamous March 2020 collapse, as investors continue to face fears of a recession. Oil prices continued to fall in the wake of the central bank’s decision to raise interest rates by a record 75 basis points, with WTI futures for July settling at $ 104.48 a barrel in mid-day trading on Wednesday. reduced by 4.8% per day. and 8.8% below last week’s ceiling. Meanwhile, Brent crude futures for August delivery traded 4% lower at $ 110.10 a barrel on Wednesday, down 9.4% from last week’s high.

While crude prices have been hit hard, oil and gas reserves have gone even worse, with energy stocks facing almost double the selling pressure compared to WTI crude.

“To date, Energy is the only sector in the green … but it is now worried that the Bears are chasing the winners, so they may be wasting energy. “It is currently -9% below last Friday’s close. Crude oil is up 50 DMA and has a stronger technical standard.” MKM Chief Purchasing Technician JC O’Hara wrote in a note to customers.

“Normally we like to buy pullbacks in uptrends. Our concern at this point in the Bear market cycle is that leading stocks are often the last domino to fall, and so profit is the biggest motivator. The fight or flight mentality favors this flight moment, so we would rather limit our position on energy stocks and win some of the big gains made after the low coronavirus in March 2020,“, he added.

Related: Russian refinery on fire after hitting a drone with a kamikaze

According to O’Hara chart analysis, these energy stocks have the highest risk of falling:

Antero Midstream (NYSE: AM), Archrock (NYSE: AROC), Baker Hughes (NASDAQ: BKR), DMC Global (NASDAQ: BOOM), ChampionX (NASDAQ: CHX), Core Labs (NYSE: CLB), ConocoPhillips (NYSE: COP), Callon Petroleum (NYSE: CPE), Chevron (NYSE: CVX), Dril-Quip (NYSE: DRQ), Devon Energy (NYSE: DVN), EOG resources (NYSE: EOG), Equitrans Midstream (NYSE: ETRN), Diamondback Energy (NASDAQ: FANG), Green plains (NASDAQ: GPRE), Halliburton (NYSE: HAL), Helix Energy (NYSE: HLX), World Fuel Services (NYSE: INT), Kinder Morgan (NYSE: KMI), ΝΟΕ (NYSE: ΝΟΕ), International Oceanography (NYSE: OII), Oil States International (NYSE: OIS), ΟΝΕΟΚ (NYSE: OKE), ProPetro (NYSE: PUMP), Pioneers Natural Resources (NYSE: PXD), RPC (NYSE: RES), REX American Resources (NYSE: REX), Schlumberger (NYSE: SLB), Silicon USA (NYSE: SLCA), Bristow Group (NYSE: VTOL), and The Williams companies (NYSE: WMB).

Tight supplies

While the bear camp, including O’Hara, believes the oil price rally is over, the bulls have stood their ground and see the latest selloff as a temporary discount.

In a recent interview, Michael O’Brien, head of Core Canadian Equities at TD Asset Management, told Kim Parlee of TD Wealth that fundamentals of oil supply / demand remain stable thanks in large part to years of underinvestment by both private and private producers. and by NOCs.

You can blame ESG — as well as the expectations for a lower environment for longer oil prices for the last two years — for the R&D companies’ capital costs (E&P). Indeed, the actual and announced capital cuts have fallen below the minimum levels required to offset the exhaustion, let alone meet any expected growth. Expenditures on oil and gas fell from their peak in 2014, with global R&D spending (E&P) reaching nadir in 2020 at a 13-year low of just $ 450 billion.

Even with higher oil prices, energy companies are only gradually increasing capital spending, with the majority preferring to return surplus cash to shareholders in the form of dividends and repurchase shares. Others like it BP Plc. (NYSE: BP) and Shell Plc. (NYSE: SHEL) have already committed to long-term production cuts and will strive to reverse their trajectories.

Norway-based energy consulting firm Rystad Energy has warned that Big Oil could see its proven reserves depleted in less than 15 years, thanks to the complete replacement of the volumes produced with new discoveries.

According to Rystad, proven oil and gas reserves from the so-called Big Oil companies, ie ExxonMobil (NYSE: XOM), BP Plc., Shell, Chevron (NYSE: CVX), TotalEnergies (NYSE: TTE), and Eni SpA (NYSE: E) everything is falling apart, as the volumes produced are not completely replaced by new discoveries.

Source: Oil and Gas Journal

Huge impairment charges have led Big Oil’s proven reserves to fall by 13 billion boe, satisfactory by ~ 15% of its ground reserves. Rystad now says the remaining reserves will be depleted in less than 15 years, unless Big Oil makes more commercial discoveries quickly.

The main culprit: Rapid contraction of exploration investments.

Global oil and gas companies reduced their capitalization by a staggering 34% in 2020 in response to declining demand and investors worried about the industry’s persistently low returns.

ExxonMobil, whose proven reserves shrank by 7 billion boe in 2020, or 30% from 2019 levels, was hit hardest by significant cuts in Canadian oil sand and shale gas holdings in the US.

Shell, meanwhile, has seen its proven inventories fall 20% to 9 billion boe last year. Chevron lost 2 billion boe of proven reserves due to impairment charges, while BP lost 1 boe. Only Total and Eni have avoided reductions in proven reserves over the last decade.

The result? The US shale industry has only managed to increase crude production in 2022 by just 800,000 b / d, while OPEC is constantly striving to achieve its goals. In fact, the situation has become so bad for the 13 countries that make up the cartel that OPEC + produced 2.695 million barrels per day below its crude oil targets in May.

Exxon CEO Darren Woods predicts that crude markets will remain tight for up to five years, with time required for companies to “cover” the investment needed to ensure supply can meet demand. .

“Supplies will remain limited and will continue to support high oil prices. The standard for ICE Brent is still around $ 120 / barrel.” PVM analyst Stephen Brennock told Reuters after the last sale of crude oil.

In other words, the oil price rally may be far from over and the latest correction could provide new entry points for investors.

Credit Suisse Energy analyst Manav Gupta weighed shares with the biggest exposure to oil and gas prices. You can find them here.

In the meantime, you can find some of the cheapest oil and gas reserves here.

By Alex Kimani for Oilprice.com

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