What happened
Oil- and gas-related stocks such as Devon Energy (DVN 0.84%), Tellurian (TELL -5.47%), and Transocean (RIG 2.24%) rallied today, up 4.8%, 7%, and 5.8%, respectively, as of 12:41 p.m. ET.
Devon is an oil and gas driller in U.S. shale basins, Tellurian is a natural-gas-focused company that's building an expensive liquefied natural gas (LNG) plant and also owns some upstream assets, and Transocean supplies drilling rigs to deepwater oil and gas drillers. However, each is levered to the prices of oil and gas, which were both on the rise Thursday after weeks of declines.
In addition, Tellurian reported the closing of an acquisition it announced last month, which won some plaudits from the analyst community.
So what
Oil prices were up more than 2.5% today, back over $90, while natural gas prices surged to a yearly high, even surpassing the price shortly after Russia's invasion of Ukraine.
Yesterday, the Energy Information Administration (EIA) reported that oil inventories fell by 7.1 million barrels, and gasoline stockpiles fell by 4.6 million barrels last week, more than expected. In addition, while U.S. natural gas supplies increased by 18 billion cubic feet (bcf), that was below expectations for 34 billion bcf.
It appears as though demand in the U.S. surprised to the upside. Gasoline prices have fallen significantly since June, so it may be that price elasticity is leading more people to go on road trips toward the end of summer, or return to their prior habits of driving more as gas prices have fallen.
In recent weeks, oil prices have fallen on weak China demand, the prospect of an Iran nuclear deal, and fears over a recession in the U.S. However, recent economic data from the U.S. has been better than feared, so perhaps the post-Ukraine invasion shock is finally waning, and demand and supply are coming more into balance near these levels.
In addition to the marketwide bounce in oil and gas stocks, Tellurian announced it was closing the $125.5 million deal it made last month for privately owned EnSight, which owns natural gas assets in the Haynesville shale. As a reminder, Tellurian is still inking losses as it builds out its $12.8 billion Driftwood liquified natural gas export plant. That plant isn't set to come online until 2026, but Tellurian has also invested in some natural-gas-producing assets that will theoretically generate cash flow to help offset construction costs. Given that natural gas just hit yearly highs, it appears as though that bet on commodity prices is paying off.
President and CEO Octávio Simões said:
This closing represents significant progress for Tellurian and our business model. By owning and operating upstream assets, a pipeline network and the Driftwood LNG terminal, Tellurian will have the ability to sell natural gas into domestic or international markets. This combination of assets represents a compelling value for our shareholders.
With Russia looking to squeeze European countries by partially shutting off its natural gas flows through the Nord Stream pipeline, natural gas prices are surging there, which only appears to strengthen the case for LNG exports from the U.S. That bodes well for all aspects of U.S. natural gas, including the pricey LNG export plants under construction like Driftwood.
Now what
The energy markets have been fascinating this year: The supply crunch from the Russia-Ukraine war and the hangover from the lack of production during the pandemic are running into fears of a recession, the U.S. released oil from the Strategic Petroleum Reserve, China's ordered sweeping lockdowns to combat COVID-19 cases, and a U.S.-Iran nuclear deal appears to be in the works.
Energy is very consequential as a contributor to inflation figures and economic health. Therefore, energy stocks can be highly attractive as portfolio-diversifiers, both for their shareholder payouts amid their newfound supply discipline and for their hedging characteristics against future energy supply crunches.
