Despite an uncertain economic outlook, oil prices rose again on Thursday as Saudi Arabia and Russia decided to prolong output limits through the end of 2023.
Goldman Sachs Commodities Research predicts that oil supply cuts could lead to Brent crude surging to as high as $107 per barrel in 2024. The impact of oil prices on energy stocks is significant, particularly in the oil and gas industry.
Yousef M Alshammari, the chief executive and head of oil research at CMarkits, observed that energy stocks experienced a rise in August due to the rally in oil prices. Brent crude is now trading 23% higher than its July levels and is expected to rise even further towards the end of the year, particularly due to the extension of the Saudi-Russian voluntary cuts. As a result, the financial performance of energy companies is likely to improve as we approach Q4 this year.
The energy sector is currently the best-performing industry of the S&P 500 index this quarter. After Russia’s invasion of Ukraine led to an increase in oil prices last year, it was the only sector to finish with gains.
Sophie Lund-Yates, the lead equity analyst at Hargreaves Lansdown, noted that the soaring oil price is driving up the share prices of major oil companies. When oil prices rise, oil majors benefit from increased free cash flow and can invest further in renewable research and development. However, not all oil and gas companies are focused on future-thinking energy solutions with the same level of enthusiasm.
Lund-Yates pointed out that the market recognizes that oil prices are cyclical and that they will eventually turn. Therefore, the changes made by companies such as ExxonMobil, BP, and Shell due to the rising oil prices have not been overly dramatic. The prices of these companies will continue to be influenced by developments from OPEC+. If there is a further extension of production cuts, oil prices could continue to climb. However, the opposite is also true.
Russ Mould, the investment director at AJ Bell, explained that the higher the oil price Goes, the better oil stocks tend to perform. Higher crude prices lead to higher profits and usually Higher cash flow, which can result in more generous dividends or buyback schemes. However, he also noted that oil companies often have downstream operations as well, and oil is an input cost and feedstock for those refining petrochemical and chemical operations. Therefore, higher prices can harm profit margins in these operations.
Furthermore, oil majors may also be exposed to gas, as shown by the drop in Europe’s Dutch TTF prices this year following the 2022 spike caused by the Russian invasion of Ukraine.
Chevron Long (Buy)
Enter At: 168.80
T.P_1: 173.41
T.P_2: 181.54
T.P_3: 190.14
T.P_4: 195.84
T.P_5: 201.79
T.P_6: 208.83
T.P_7: 215.00
S.L: 134.30
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