With earnings season upon us, investors will be listening for clues about the impact of inflation, supply chain disruptions, and rising oil prices. Delta Airlines (DAL) will report earnings on Thursday. I’m always interested in the ways that airline companies manage their fuel costs. It wasn’t long ago that oil traded under $70. It was a good time to hedge against rising costs of anything related to oil byproducts.
Now, with WTI crude above $81 and Brent crude looking to rally past $84, the question is this…
Do companies feel lucky?
The COVID Impact on Rising Oil Prices
Oil prices are bouncing higher again today after news spread about the state of the Omicron variant. The CDC has lost the messaging battle at this point. Mainstream media has effectively thrown in the towel with the hysterics. The variant – while still dangerous – has received comparisons to the flu. And despite numerous vaccinations and boosters, about 50% of the people I talk to have already been infected.
I expect the other half – myself included – to catch the strain sooner or later. Unless I already have and just have no clue if I’m just perpetually tired and 40… I assume they’re the same feeling.
Projections anticipate that half of Europe will catch the variant in the next 45 days. Here in Florida, we’re at double our previous peak in 2021. This looks like it will burn through and likely have a relatively minimal impact on macroeconomic demand for oil.
The trickier issue is that in 2022, demand should start to overtake supply in a relatively quick fashion as well. I’ve noted before that the global energy markets are facing a lack of capital expenditure for new wells and production that could total north of $500 billion.
Biden can pull more oil from the strategic petroleum reserve, but it’s not going to make a dent. Besides, the purpose of the reserve isn’t to be there for higher prices – it’s supposed to be there in the event of massive supply disruptions (Think OPEC’s standoff in the 1970s). The reserve isn’t there to manipulate prices.
The Path to $85, $90… and $100 Crude
Despite the ongoing surge in COVID, the world used 97.53 million barrels of oil every single day. This year, the figure is expected to hit 100.88 million barrels, according to the Energy Information Administration. On the supply side, OPEC is still well behind the amount of production it hit back in 2019 before the crisis.
And although they’ve committed to increasing supply by 400,000 barrels per month – despite the fact that all nations cheat on their quotas – OPEC isn’t exactly in the mood to see oil prices crater back to the $60s.
These nations fund their government programs on crude oil. They want higher prices…
Finally, keep in mind that the Environmental, Social, Governance (ESG) standards are driving up the price of capital for oil producers. I anticipate a combination of merger and acquisition in the energy space combined with companies with strong balance sheets just sitting on their hands. If they don’t need to drill, they’ll just let their share prices climb thanks to rising oil prices (linked to their existing reserves).
That’s good news for companies like EOG Resources (EOG), Marathon Oil (MRO), Diamondback Energy (FANG), Exxon Mobil (XOM), and Chevron (CVX). Rising oil prices mean rising share prices in these five stocks. Pick one or two, and use the trend to your advantage.