Crude oil prices rose to over $130 per barrel in March 2022 when Russia invaded Ukraine. After the U.S. released unprecedented barrels from its Strategic Petroleum Reserve in 2022 and 2023 to cap prices, they fell below the $70 per barrel level. The U.S. SPR held over 600 million barrels of crude oil in late 2021. As of October 16, the SPR at 351.3 million had dropped by over 40% to a four-decade low. The U.S. administration has repurchased approximately four million barrels over the past months when prices were under pressure.
Meanwhile, in October 2023, the outbreak of war in Israel after the October 7 terrorist attacks caused crude oil prices to rise. With the energy commodity that powers the world at over $83 per barrel on October 24, the prospects are for higher oil prices, and shares of companies involved in oil-related industries could offer value. An escalating war in the Middle East may cause another price spike that could exceed the 2022 fourteen-year high and challenge the 2008 record peak.
Investors and traders have been buying traditional energy-related products as the path of least resistance has turned higher.
The reasons why oil can soar
- According to the U.S. Energy Information Administration, “Although exports increased in the first half of 2023, the United States still imports more crude oil than it exports, meaning it is a net crude oil importer.”
- Under the current administration, U.S. energy policy supports alternative and renewable fuels and inhibits petroleum production and consumption.
- OPEC+ production policy is influential in determining the worldwide petroleum price.
- The wars in Ukraine and the Middle East will continue to increase supply concerns.
Natural gas is heading into the peak season
- S. natural gas prices have made higher lows and higher highs since the April 2023 low below $2 per MMBtu.
- The injection season, where U.S. natural gas inventories rise, will end in November, and stockpiles will decline until March 2024.
- LNG exports have made U.S. natural gas prices more sensitive to European and worldwide natural gas prices as LNG travels by ocean vessels to regions where prices are higher.
- European prices reached record highs in 2022 due to supply concerns from Russia. A warm 2022/2023 winter caused a downside correction. There is no guarantee that the 2023/2024 winter will be a repeat of the previous year.
Oil and gas ETF products that will rise with prices
- USO and BNO are the ETF products that track NYMEX WTI and ICE Brent benchmark crude oil futures prices.
- UCO is a leveraged product that turbocharges USO’s performance.
- The UNG ETF tracks U.S. natural gas prices.
- BOIL is a bullish leveraged product that turbocharges UNG’s performance.
Specific oil and gas companies with upside potential
- XOM and CVX are the leading U.S. diversified oil companies that rise and fall with crude oil prices.
- BP, SHEL, and TTE are top European diversified oil companies that trade on the stock exchange.
- BKR and HAL are the leading U.S. oil services companies, and SLB is a top European company in the sector.
- MPC and VLO are petroleum refining companies.
- These companies’ earnings have benefited from higher oil and oil product prices over the past years and should continue to profit at current and higher traditional energy prices.
Diversified energy ETF products that are trending higher
- The XLE is the leading and most liquid U.S. traditional energy ETF, holding a diversified portfolio of oil and gas-related companies.
- The VDE ETF holds many of the same companies as the XLE.
- The OIH ETF provides exposure to the top oil services companies.
- The DBE ETF owns a portfolio of the most liquid crude oil, oil products, and natural gas futures contracts.
An escalating war in the Middle East could increase oil and gas prices and price variance over the coming months, challenging the 2022 fourteen-year highs. Energy continues to be a haven for investors during volatile and uncertain times.
Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!