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How we think about our oil inventories in light of Monday’s crude price surge
Rana AdamNovember 22, 2022
A volatile session for crude on Monday shows why we continue to stick to our energy holdings and view short-term price declines as opportunities to add to our exposure. Crude futures hit session lows on Monday after Saudi Arabia denied a Wall Street Journal report suggesting a 500,000 barrel-per-day oil production boost was on the table at the December OPEC meeting. US and international oil benchmarks initially fell more than 5% following the report. West Texas Intermediate crude recouped much of the losses following the Saudi rejection, trading down less than 1% to nearly $80 a barrel around 2:40 p.m. ET. Brent crude fell about 0.4% to just over $87 a barrel. The sharp drop earlier seemed to reflect traders’ surprise that more supply could hit the market – remember less than two months ago the Organization of the Petroleum Exporting Countries and a cohort of Russian-led producer partners, known collectively as OPEC+, have cut oil production targets by 2 million barrels per day. The October production cut was seen, at the time, as an attempt to prop up falling oil prices, and generally speaking, it worked for a while. However, since the first week of November, crude prices had been trending lower. That’s not exactly the backdrop that would lead market participants to expect production increases, which could explain the magnitude of crude’s initial drop. At its low on Monday, WTI hit its lowest level since early January. The various OPEC+ stocks are the main driver of Monday’s crude movement. Still, it’s worth noting that Beijing’s decision to implement tougher Covid restrictions in the city isn’t helping matters either. China’s strict Covid policy has weighed on the world’s second-largest economy and, as a result, dampened demand for oil. China is the largest oil importer in the world, so its actions have a big impact on the market. The Club’s take Our energy stocks struggled in November alongside the decline in oil. The four energy stocks in our portfolio – Devon Energy (DVN), Coterra Energy (CTRA), Pioneer Natural Resources (PXD) and Halliburton (HAL) – are down month-to-date from a gain of around 2% for the S&P 500. We see the weakness as an opportunity to strategically add to our exposure to the sector, as evidenced by our decision on Friday to acquire an additional 100 shares of high-yielding Coterra. Our outlook hinges on two developments that would push oil prices higher. The first is the White House’s announcement in late October that it would begin to replenish the Strategic Petroleum Reserve when oil prices were at or below $67 to $72 a barrel. The Biden administration has been a seller since the spring in releasing SPR barrels, a move it took to mitigate high oil prices linked to Russia’s invasion of Ukraine. We think Oil would find support above that $67-$72 range because the market knows there is a big buyer below. And in that $67 to $72 range, our energy producers – Coterra, Devon and Pioneer – can still generate plenty of free cash flow to return to shareholders through dividends and buyouts. It’s remarkable because those capital returns are one of the main reasons we own their stocks. The second bullish oil development we anticipate concerns China. We believe that the government’s so-called “zero Covid” policy cannot last forever, and as its negative consequences accumulate, we believe that the Chinese Communist Party will adopt a position that supports economic activity and, by extension, oil demand. We have seen some relaxations such as quarantine time for international travellers. Nevertheless, the latest tightening in Beijing shows that it will not be a straight line towards the reopening of China. (Jim Cramer’s Charitable Trust is long PXD, DVN, CTRA and HAL. See here for a full list of stocks.) As a CNBC Investing Club subscriber with Jim Cramer, you will receive a trade alert before Jim makes a transaction. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. NO OBLIGATION OR FIDUCIARY DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.
An oil pumpjack in the Inglewood Oilfield as seen from the Kenneth Hahn State Recreation Area on July 13, 2022, in Los Angeles, California.
Patrick T. Fallon | AFP | Getty Images
A volatile session for crude on Monday shows why we continue to stick to our energy holdings and view short-term price declines as opportunities to add to our exposure.
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Rana AdamNovember 22, 2022
