Shares of ExxonMobil (XOM 1.25%), Occidental Petroleum (OXY 4.29%), and Core Laboratories (CLB 2.62%) rose sharply this week, with these stocks up 11.6%, 13.2%, and 14.3% on the week, respectively, as of 3 p.m. ET on Thursday.
Oil is very sensitive to macroeconomic and geopolitical news, and it was a busy week on that front. Better news about the omicron coronavirus variant, strong U.S. jobs growth, and a drama-free OPEC+ meeting all boosted sentiment for demand, pointing to a scenario in which the omicron variant's impact on the economy would likely be less than feared.
Last weekend and on Monday morning, Food and Drug Administration (FDA) commissioner Dr. Scott Gottlieb appeared on television, highlighting data pointing to the omicron variant causing less severe disease, while also perhaps peaking quickly and subsiding by February. That's likely much sooner than most forecasters suspected. Given fears over renewed lockdowns since omicron hit in December, the optimistic forecast was also a relief to oil markets.
More good economic news arrived in Wednesday's December private payroll number, which also came in stronger than expected. Payrolls rose a surprising 807,000 in December, much higher than the 400,000 estimate.
And on Tuesday, OPEC+ officials decided to stick with its prior plans to increase production by 400,000 barrels a day starting in February. Some had wondered, with omicron spreading fast, if OPEC+ would hold off on the planned production increase, but officials decided to go ahead.
You might think that would cause the price of oil to go lower, but oil prices actually held firm and even rose a little over the past few days. That may be because analysts took the production increase to indicate OPEC+ isn't worried about flagging demand in the near term. Additionally, sticking with its December plan also likely boosted confidence in the stability of the market. If there's one thing investors like more than growth, it's certainty -- especially for commodities.
In terms of these individual companies, Exxon received an upgrade from Truist analyst Neal Dingmann, who upgraded Exxon from sell to neutral and raised his price target from $50 to $65. The upgrade was based on his more favorable outlook for dividend increases and share repurchases in 2022. Sure, even that price is below today's $68 stock price, but Dingmann was one of the most bearish analysts on Exxon out there, so to see Exxon's biggest skeptic throw in the towel was a big plus.
Occidental Petroleum also benefits from sustained high oil prices. It's one of the most heavily indebted producers in the entire oil space, with about $30 billion in net debt against just a $30 billion market cap -- the result of its 2019 acquisition of Anadarko. Oil prices staying at these high levels would allow the company to de-lever much quicker.
Finally, Core Laboratories is a bit unlike these other two companies. It's a small-cap oil services company that helps producers identify sweet spots and enhance productivity. Core Labs hasn't participated in the energy stock rally as the explorers have, likely because it more indirectly benefits from higher oil when exploration and production ramp up. However, part of what's keeping oil prices high today is the discipline in production growth shown by OPEC+ and U.S. shale players. And with so much uncertainty in the demand outlook, investment in exploration and production could continue to track below pre-pandemic levels.
That being said, there does come a price at which the current producers will invest in production growth again. This week's OPEC+ decision is an indication of that. With oil prices creeping back toward $80 per barrel this week, we could be getting to that point for more producers -- hence, why Core Labs spiked this week.
Oil stocks were the best-performing segment of the market in 2021 -- especially the upstream producers. While some may think this was a short-term blip based on the rollout of vaccines, economic reopening, and supply constraints, prices could stay this high for a while.
The sector has been underinvesting in exploration and production for years, and while electric vehicles and clean energy alternatives are growing at a fast pace, they are still a small portion of the overall auto and energy markets.
With the U.S. economy looking strong and chastened energy producers now focusing more on shareholder returns than growth, we could see oil prices stay this high for some time, or even move higher on any type of geopolitical shock. Given that many oil producers currently trade at low multiples based on today's earnings, I wouldn't be surprised to see energy stocks outperform again this year.