Please ensure Javascript is enabled for purposes of website accessibility

Why Energy Stocks Are Up Big This Week

By Matthew DiLallo - Jun 3, 2021 at 4:16PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Several catalysts fueled a rally in the energy market 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 (CLB -2.20%)Clean Energy Fuels (CLNE -1.33%)Oceaneering International (OII 1.29%), and Occidental Petroleum (OXY -0.57%)

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 (SLB -0.62%). 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 (AMZN 0.54%) 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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Matthew DiLallo owns shares of Core Laboratories. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Clean Energy Fuels, Core Laboratories, and Oceaneering International and recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Occidental Petroleum Corporation Stock Quote
Occidental Petroleum Corporation
$65.31 (-0.57%) $0.38, Inc. Stock Quote, Inc.
$141.40 (0.54%) $0.76
Core Laboratories N.V. Stock Quote
Core Laboratories N.V.
$16.86 (-2.20%) $0.38
Schlumberger Limited Stock Quote
Schlumberger Limited
$36.66 (-0.62%) $0.23
Clean Energy Fuels Corp. Stock Quote
Clean Energy Fuels Corp.
$8.16 (-1.33%) $0.11
Oceaneering International, Inc. Stock Quote
Oceaneering International, Inc.
$9.45 (1.29%) $0.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.