What happened
Crude oil was on fire today. WTI, the leading U.S. oil price benchmark, rose as much at 12.5% by 2:45 p.m. EDT on Monday and closed above $32 a barrel. Meanwhile, the global oil benchmark price, Brent, rallied about 7.5%, closing around $35 a barrel.
That big uptick in oil prices fueled most oil stocks today. Several soared more than 10%, including many midstream companies, known more for paying high-yielding dividends. Among the notable movers in that group were Targa Resources (TRGP 1.93%), Antero Midstream (AM 1.20%), ONEOK (OKE 0.55%), Phillips 66 (PSX 1.14%), EnLink Midstream (ENLC -0.29%), and Western Midstream Partners (WES -0.31%). At the close, gains ranged from 7.5% for Phillips 66 to almost 16% for Targa Resources.
Image source: Getty Images.
So what
Several factors fueled oil prices today. One of them was a report by the U.S. Energy Administration, which projected that oil production from seven major U.S. shale plays would decline by 197,000 barrels per day in June. That's noteworthy considering the current oversupply issue in the U.S., which had the country on track to run out of storage space. But with U.S. producers slashing their output, storage likely won't be an issue, removing a major weight on oil prices.
On top of that, demand has started rebounding now that governments have begun lifting travel and business restrictions. Oil consumption in China has already bounced back to where it was before the COVID-19 pandemic forced that country into a lockdown. Meanwhile, demand in the U.S. has started recovering from its low last month as more people venture out.
The quick bounce back in consumption bodes well for the companies that transport, process, and refine oil and gas. It suggests the volumes flowing through their systems will rebound soon, which will boost their volume-based fee income. Meanwhile, higher oil prices will benefit their commodity-based earnings.
The energy sector's initial turbulence forced many midstream companies to reduce their dividends so that they could conserve some cash. Targa Resources slashed its dividend 89% while EnLink and Western Midstream both cut theirs in half. Those reductions caused concerns that others like Phillips 66, ONEOK, and Antero Midstream might have to make similar moves, given their currently high yields of 4.7%, 10.6%, and 30.5%, respectively.
But with market conditions starting to improve, it increases the probability that those payouts could survive this downturn. Meanwhile, the seemingly rapid recovery in oil demand likely means that companies such as EnLink and Western Midstream won't need to make an additional reduction in their dividends (which still yield 20.4% and 15.2%, respectively) and bring them down to Targa's level of a 2.3% yield.
Now what
Oil demand seems to be rebounding more quickly than most analysts anticipated. Add that to the supply reductions, and the issues that had been weighing on crude prices are slowly lifting. That's fueling the view that energy companies in the U.S. could resume some of their drilling activities sooner than expected, which would boost the volumes flowing through midstream systems. That would increase the income those companies generate, making it easier for them to support their high-yielding dividends.
But investors need to be cautious because a second wave of COVID-19 cases could tap the brakes on oil demand. Meanwhile, many oil drillers have been so financially weakened by the downturn that they might still go bankrupt, which could impact their ability to pay fees to midstream companies. Because of that, investors need to remain cautious, especially if they're buying an energy stock solely for its dividend yield.
