Why Energy Stocks Are Up Big This Week

What happened

Several energy stocks were up by more than 10% this week as of Thursday afternoon. Among the notable names joining that rally were Core Laboratories (NYSE:CLB)Clean Energy Fuels (NASDAQ:CLNE)Oceaneering International (NYSE:OII), and Occidental Petroleum (NYSE:OXY)

A couple of catalysts fueled the surge in energy stocks this week. The biggest driver was the continued improvement in oil prices, which approached a more than two-year high this week. Those higher prices have oil companies growing increasingly optimistic about what’s ahead for the oil industry

The silhouette of a person next to an oil well.

Image source: Getty Images.

So what

WTI, the primary U.S. oil price benchmark, rallied to a more than two-year high at one point this week. While oil was down slightly on Thursday, it closed within $ 0.02 of a more than two-year high at nearly $ 69 a barrel.  

One factor fueling higher oil prices was a more than 5 million barrel decline in U.S. oil inventory levels over the past week. That’s happening because the economy continues burning off excess supply as demand recovers from the pandemic. OPEC also reportedly agreed this week to continue its current pace of gradually returning its output to the market. Those positives should help offset some potential near-term headwinds, including the devastating COVID-19 outbreak in India — the third-largest oil market — and the possibility that Iran will bring more supplies back online. Oil market watchers expect oil consumption to continue recovering as increasing vaccinations enable the global economy to fully reopen in the coming months. With supplies remaining constrained and demand improving, oil prices could continue rallying.  

That’s great news for an oil producer like Occidental Petroleum. Higher oil prices will enable the company to generate more cash to use on repaying debt. The prospect of higher prices drove an analyst at Barclays to make some positive comments about Occidental this week. The analyst noted that they like the company because of its sensitivity to oil prices since that should enable it to do well if they continue rising. 

Higher oil prices will also give oil companies the cash flow to invest in new wells. That will benefit oil field service companies like Core Labs and Oceaneering International. They’re rallying this week on that prospect and some bullish comments by the CEO of oilfield services leader Schlumberger (NYSE:SLB). On Wednesday, Schlumberger’s CEO stated at an industry conference that “With oil demand projected to reach pre-2019 levels by the end of 2022 and supply tightening, our oil and gas business is on the verge of an exceptional growth cycle. Given our unique position and strategy, we are positioned to deliver outstanding returns in the short and medium-term.” That “exceptional growth cycle” would also benefit other oilfield service companies like Core Labs and Oceaneering International. They’d likely see increased service volumes and improved pricing, which would boost their margins and cash flow. 

Finally, Clean Energy Fuels continued its momentous rally this week, tacking another roughly 15% gain to its tally by Thursday afternoon. Overall, its shares are up more than 300% in the past year. 

Several factors are fueling that rally, including: 

  • The natural gas refueling company will benefit from higher oil prices since that would convince more fleets to convert to cheaper natural gas.
  • The company will also benefit from the reopening of the economy since that will drive more demand for fuel. 
  • It has signed several deals over the past year to supply renewable natural gas, including a large one with Amazon (NASDAQ:AMZN) in April
  • Clean Energy has also started drawing the attention of retail traders on Reddit forums like WallStreetBets, which are bidding up certain stocks. 

This combination of factors is the likely contributor behind the stock’s rally this week. 

Now what

The oil market has gotten a significant boost from higher oil prices, which have rallied to almost $ 70 a barrel this week, a roughly two-year high. That’s enabling oil producers to generate lots of cash flow that they can use to repay debt, drill more wells, and return to shareholders via dividends and stock buybacks. Moreover, this rally could continue for quite some time since demand is steadily coming back while OPEC is bringing back supplies slowly. Because of that, oil stocks could have more upside ahead in the coming months as they cash in on higher prices.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.