Is it too late to invest in the oil price rally?

The oil market is currently experiencing one of the most turbulent periods since the infamous March 2020 crash as investors continue to grapple with recession fears. Oil prices continued to fall after the central bank’s decision to raise interest rates by a record 75 basis points, with WTI futures for July settlement priced at $104.48/barrel in intraday Wednesday. on Monday, down 4.8% on the day. and 8.8% below last week’s peak. Meanwhile, Brent crude oil futures for August settlement were trading 4% lower in Wednesday’s session at $110.10/barrel, a good 9.4% below last week’s peak. While oil prices took a huge hit, oil and gas stocks fared even worse, with energy stocks experiencing nearly double the selling pressure compared to WTI crude.

“So far, Energy is the only green sector…but the concern right now is that bears are chasing winners, so they might knock Energy. up 200 DMA, which is currently -9% below last Friday’s close- fair. MKM’s Chief Market Technician JC O’Hara wrote a note to customers.

“We typically like to buy pullbacks within uptrends. Our concern at this point in the bear market cycle is that leading stocks are often the last domino to fall and therefore profit taking is the biggest motivator. Fight-or-flight mentality currently favors flight, so we prefer to reduce our positioning in energy stocks and reap some of the massive gains achieved after the March 2020 COVID low,“, he added.

Related: Russian refinery on fire after Kamikaze drone attack

According to O’Hara’s chart analysis, these energy stocks have the highest downside risk:

Antero Midstream (NYSE:AM), Archrock (NYSE:AROC), Baker Hughes (NASDAQ:BKR), Global DMC (NASDAQ:BOOM), champion X (NASDAQ:CHX), main laboratories (NYSE:CLB), ConocoPhillips (NYSE:COP), Callon Petroleum (NYSE:CPE), chevron (NYSE:CVX), Drill-Quip (NYSE: DRQ), Devon energy (NYSE: DVN), EOG resources (NYSE:EOG), Equitrans Midstream (NYSE:ETRN), Diamondback Energy (NASDAQ: FANG), green plains (NASDAQ:GPRE), halliburton (NYSE: HAL), propeller energy (NYSE: HLX), World Fuel Services (NYSE:INT), Morgan children (NYSE: KMI), NOVEMBER (NYSE: NOV), international oceaneering (NYSE:OII), Oil States International (NYSE: OIS), ONEOK (NYSE: OK), ProPetro (NYSE: BOMBA), Pioneering Natural Resources (NYSE:PXD), RPC (NYSE:RES), American Resources REX (NYSE:REX), Schlumberger (NYSE:SLB), USA silica (NYSE: SLCA), Bristow Group (NYSE:VTOL), and The Williams Companies (NYSE: WMB).

tight supplies

Whereas the bear camp, including the likes of O’Hara believes the oil price rally is over, bulls have held firm and see the latest sell-off as a temporary blip.

Inside a recent interview, Michael O’Brien, Head of Core Canadian Equities at TD Asset Management, told Kim Parlee of TD Wealth that oil supply/demand fundamentals remain solid thanks in large part to years of underinvestment by both private producers and by NOCs.

You can blame ESG — as well as expectations of a lower oil price environment for longer over the past two years — for impacting exploration and production (E&P) companies’ capital spending. In fact, actual and announced capex cuts have fallen below the minimum levels needed to offset depletion, let alone meet any expected growth. Spending on oil and gas has fallen from its peak in 2014, with global spending by exploration and production (E&P) companies hitting a nadir in 2020 to a low. Low in 13 years of just $450 billion.

Even with higher oil prices, energy companies are gradually increasing capital spending, with most preferring to return excess cash to shareholders in the form of dividends and share buybacks. others like BP Plc. (NYSE:BP) and Shell Plc. (NYSE:SHEL) have already committed to long-term production cuts and will fight to reverse their trajectory.

Norwegian energy consultancy Rystad Energy has warned that major oil companies could see their proven reserves run out in less than 15 years, thanks to produced volumes not being fully replaced by new discoveries.

According to Rystad, the proven oil and gas reserves of the so-called big oil companies are ExxonMobil (NYSE:XOM), BP Plc., Shell, chevron (NYSE:CVX), TotalEnergies (NYSE:TTE), and Eni SpA (NYSE:E) are all falling as volumes produced are not being fully replaced by new discoveries.

Source: Oil and Gas Magazine

Massive loads of deterioration saw Big Oil’s proven reserves drop by 13 billion boe, good for ~15% of its ground stock levels. Rystad now says the remaining reserves are likely to be depleted in less than 15 years unless Big Oil makes more commercial discoveries quickly.

The main culprit: Investments in exploration are decreasing rapidly.

Global oil and gas companies cut your capex by a staggering 34% in 2020 in response to dwindling demand and investors increasingly wary of the sector’s persistently poor returns.

ExxonMobil, whose proven reserves shrank 7 billion boe in 2020, or 30%, from 2019 levels, has been hit hardest after large reductions in Canadian oil sands and US shale gas properties.

Shell, meanwhile, saw its proven reserves drop 20% to 9 billion boe last year; Chevron lost 2 billion boe of proven reserves due to impairment charges, while BP lost 1 boe. Only Total and Eni avoided reductions in proved reserves over the past decade.

The result? The US shale industry was only able to increase oil production in 2022 by just 800,000 b/d, while OPEC has consistently struggled to meet its targets. In fact, the situation got so bad for the 13 countries that make up the cartel that OPEC+ produced 2.695 million barrels per day below its crude oil targets In may.

Exxon CEO Darren Woods predicted that oil markets will remain tight for up to five years, with time needed for companies to “catch up” with the investments needed to ensure that supply meets demand.

“Inventories will remain tight and will continue to support high oil prices. The norm for ICE Brent is still around the $120/barrel mark,” PVM analyst Stephen Brennock told Reuters after the latest oil sale.

In other words, the oil price rally may be far from over, and the latest correction may offer new entry points for investors.

Swiss credit Energy analyst Manav Gupta rated the stocks with the most exposure to oil and gas prices. you can find them here.

In the meantime, you can find some of the cheapest oil and gas stocks here.

By Alex Kimani for Oilprice.com

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