After a brief hiatus, the oil price rally is back on track. Crude oil closed with its seventh straight weekly gain thanks to tight fuel supplies sustaining bullish sentiment. After a brief fall on Friday following news that U.S. inflation surged to a fresh 40-year high, WTI crude rebounded to end the week with a 1.5% gain to trade at $122.40/barrel, while Brent crude settled 1.9% higher at $124.03.
As the summer driving season moves into full swing, high fuel prices clearly portend a summer of pain ahead. For the first time in history, U.S. motorists are forking over $5 for a gallon of gas, with the current price of $5.014 for regular petrol and $5.771 for diesel, both all-time highs.
Naturally, a cross-section of Wall Street is fretting that high fuel prices, coupled with runaway inflation, might trigger demand destruction and eventually depress oil prices.
"The concern is [high inflation] could be a forward indicator of consumer habits, and even though gasoline demand is strong now, it's a sign in the future that if gasoline prices don't stabilize then consumers will be cutting back," Price Futures analyst Phil Flynn has told CNBC.
Luckily for the bulls, the opposite camp, including oil bulls like Goldman Sachs, have opined that energy prices are still not high enough to curb demand.
GS' sentiment is supported by current data: the latest EIA data showed a further decline in U.S. gasoline inventories. Meanwhile, in another indication of extreme market tightness, Bloomberg has reported that North Sea Forties crude is trading at a premium of more than $4/bbl to Brent, the biggest spread since at least 2008. North Sea Forties is one of the grades that underpins the global Dated Brent benchmark.
Although oil and gas stocks have generally rallied sharply alongside the commodity boom, the gains have not been uniform, with some sectors performing better than their peers. Credit Suisse energy analyst Manav Gupta has weighed in on the stocks with the most exposure to oil and gas prices. Here are his top 5 picks in different oil and gas industries.
Integrated Oil and Gas: Cenovus
Canadian Oil Sands oil company Cenovus Energy (NYSE:CVE) develops, produces, and markets crude oil, natural gas liquids, and natural gas in Canada, the United States, and the Asia Pacific region. The company operates through Oil Sands, Conventional, and Refining and Marketing segments.
Last month, Cenovus released a statement announcing the "suspension of its crude oil price risk management activities, " essentially saying that it was ditching its hedging program. Management has maintained that the company does not "hedge" production, rather it employs a strategy to lock in profits using the company's dynamic storage assets; in any case, the risk management program is no longer needed, given the strength of the company's balance sheet and liquidity position.
In other words, CVE can now enjoy higher spot prices without the baggage of fuel hedges.
More recently, Cenovus Energy's shares have popped after it announced that it has agreed to restart the West White Rose Project offshore Newfoundland and Labrador.
The West White Rose Project is a $3.2B expansion project for the White Rose offshore oil field. The project, which is around 65% complete, was stalled for over two years following pandemic-related market collapse.
First oil from the platform is anticipated in the first half of 2026, with peak production anticipated to reach ~80,000 bbls/d, 45,000 bbls/d net to Cenovus, by year-end 2029. The remaining capital required to achieve first oil is expected to be ~$2B to $2.3B net to Cenovus.
Ovintiv Inc.(NYSE:OVV) is a Denver, Colorado-based energy company that, together with its subsidiaries, engages in the exploration, development, production, and marketing of natural gas, oil, and natural gas liquids.
The company's principal assets include Permian in west Texas and Anadarko in west-central Oklahoma, and Montney in northeast British Columbia and northwest Alberta. Its other upstream assets comprise Bakken in North Dakota, Uinta in central Utah, Horn River in northeast British Columbia, and Wheatland in southern Alberta.
Last month, Mizuho upgraded OVV to $78 from $54 (good for 32% upside to current price), citing improving tailwinds.
One of the largest oil and gas companies in the Western hemisphere, ConocoPhillips Inc. (NYSE:COP) is a Houston, Texas-based company that explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas (LNG), and natural gas liquids worldwide. It primarily engages in the conventional and tight oil reservoirs, shale gas, heavy oil, LNG, oil sands, and other production operations.
COP's portfolio includes unconventional plays in North America; conventional assets in North America, Europe, Asia, and Australia; various LNG developments; oil sands assets in Canada; and an inventory of conventional and unconventional exploration prospects. ConocoPhillips was founded in 1917 and is headquartered in Houston, Texas.
Scotia Bank recently upgraded COP shares to buy after shares trailed the E&P index by 7% year-to-date.
Last week, Qatar selected ConocoPhillips alongside Exxon Mobil (NYSE:XOM), TotalEnergies (NYSE:TTE), and Shell (NYSE:SHEL) as partners in the expansion of the world's largest liquefied natural gas project. State-owned Qatar Energy had decided to make a final investment decision alone to develop the $30B project. The four new partners reportedly would have 20%-25% in total of the offtake of the North Field expansion project.
Oil Refining: Phillips 66
Phillips 66 (NYSE: PSX) is a Houston, Texas-based energy manufacturing and logistics company. It operates through four segments: Midstream, Chemicals, Refining, and Marketing and Specialties (M&S). Phillips 66 was established in 2012 after ConocoPhillips spun off its midstream and downstream business segments.
The company's Refining segment is the most dominant, where the company refines crude oil and other feedstocks into petroleum products, such as gasoline, distillates, aviation, and renewable fuels at 12 refineries in the United States and Europe. Phillips 66 had a net crude refining throughput capacity of nearly two million barrels per day in 2021. Despite a decline in transportation fuel demand that year, the United States-based refiner slightly increased throughput capacity.
Refiners like Phillips 66 are currently enjoying high refining margins amid tight supplies and robust demand. Although there's a fair chance that high fuel prices will ultimately lead to demand destruction, Goldman Sachs says distillate fuel demand is likely to remain strong and margins to remain high due to these factors:
Diesel and jet fuel stocks are at historic lows, and seasonally-adjusted inventory draws are large and accelerating.
Jet fuel consumption is poised to accelerate into summer with a return to international travel.
High natural gas prices will lead to "gas-to-oil" switching in Europe and Asia.
The Russia / Ukraine war will reduce distillate supply, as Russia exports ~900kb/d of diesel fuel and ~900kb/d of residual feedstocks, which are largely upgraded into diesel by European and Chinese refiners.
Midstream: Targa Resources
Another Texas oil and gas company, Targa Resources Corp.(NYSE:TRGP), together with its subsidiary, Targa Resources Partners LP, owns, operates, acquires, and develops a portfolio of midstream energy assets in North America.
The company engages in gathering, compressing, treating, processing, transporting, and selling natural gas; storing, fractionating, treating, transporting, and selling natural gas liquids (NGL) and NGL products, including services to liquefied petroleum gas exporters; and gathering, purchasing, storing, terminaling, and selling crude oil.
Targa operates approximately 28,400 miles of natural gas pipelines, including 42 owned and operated processing plants; and owns or operates a total of 34 storage wells with a gross storage capacity of approximately 76 million barrels. As of December 31, 2021, the company leased and managed approximately 648 railcars; 119 transport tractors; and two company-owned pressurized NGL barges. Targa Resources Corp. was incorporated in 2005 and is headquartered in Houston, Texas.