Shares of major oil and gas stocks ExxonMobil (XOM 1.62%), Occidental Petroleum (OXY 0.45%), and Kinder Morgan (KMI 1.06%) were rising more than the market today, up in the 3% range in early trading, before pulling back to a 1.9%, 0.8%, and 1.7% gain, respectively, as of 1 p.m. ET. That was still much better than the overall market, which was negative at that time.
While Kinder Morgan and Exxon each announced asset sales today, it’s likely these stocks are bouncing along with oil prices, which rose nearly 3% in morning trading.
Surprisingly, the price of oil has nearly returned to levels where it started the year. However, Hurricane Ian is now threatening some U.S. production. With global supply still a big question mark and today’s consumer confidence numbers coming in strong, oil prices are bouncing back.
While this has been an otherwise quiet hurricane season thus far, it appears Hurricane Ian will be a strong one. Today, Ian strengthened as it hit Cuba, and seems set to eventually land on Florida’s west coast. Of note, several large oil companies with operations in the western Gulf of Mexico announced production halts for safety reasons.
The move probably won’t impact overall global supply that much, but given that oil prices have recently fallen so much on global recession worries, it’s no surprise to see them bouncing today on incrementally good news for supply.
In addition, the all-important OPEC+ group will be meeting on Oct. 5, and members are likely none too happy about the recent drop in prices. While the organization recently announced a 100,000 barrel-per-day cut at the last meeting, some believe there could be even bigger supply cuts announced next week. Many OPEC+ watchers believe Russia in particular will propose cuts of up to 1 million barrels per day.
Meanwhile, U.S. consumer confidence readings came out this morning, showing a rise to their highest levels since April. While an indirect metric, a more confident U.S. consumer generally bodes well for demand. That being said, a lot of the consumer confidence has been due to falling gas prices. So, there is a bit of a chicken-before-the-egg phenomenon happening here.
In company-specific news, Exxon announced the launch of a sale process for its North Sea offshore natural gas assets, in conjunction with joint partner Shell. Additionally, Kinder Morgan announced it would be selling half of its partial stake in the Elba Liquefaction facility in Georgia, which processes natural gas into LNG for shipping.
It’s interesting that these two companies are selling natural gas assets at this time. Natural gas has been the hot commodity this year, especially as Russia has cut off supplies to Europe, causing gas prices to soar across the continent. Likely, these big sellers are being opportunistic, cashing in mature natural gas projects to then reinvest in newer projects, or to engage in financial engineering. In the release, Kinder Morgan said it would use the proceeds for other attractive investments, which may include repurchasing its own stock.
There are too many cross-currents to know where oil markets may go next, with too many bullish and bearish factors to list. In general, oil and gas stocks look quite cheap, and the “drill baby drill” days of the shale revolution are long gone, with most producers showing supply discipline along with generous dividend and repurchase payments to shareholders.
Thus, oil and gas stocks look to be attractive additions for diversified portfolios. They help hedge against potential supply shocks that caused so much economic stress earlier this year, all while distributing big dividends investors can use to reinvest elsewhere in the meantime.
On the other hand, the recently passed Inflation Reduction Act includes tremendous electric vehicle and renewable energy subsidies, and recent oil and gas volatility is spurring large economies to de-carbonize as fast as possible.
Therefore, investors shouldn’t necessarily expect huge growth or a large multiple on any of these stocks. That’s why I think keeping a small or medium-sized position in oil and gas is prudent, though the long-term climate issues are a reason to keep that allocation in check.