What happened
Oil stocks fired up Wednesday, with shares of some of the largest upstream oil companies clocking solid gains through the day after a weak start to the week. Notable oil stocks that jumped today include ExxonMobil (XOM 0.06%), Occidental Petroleum (OXY +1.19%), and Devon Energy (DVN +1.88%). As of 1 p.m. ET Wednesday, while ExxonMobil and Occidental were each trading 3.2% higher, Devon Energy stock had shot up 5.7%.
Despite a hot inflation report that's renewed fears of a recession, investors are betting on oil stocks on the dip on the back of certain industry developments.
So what
West Texas Intermediate (WTI) crude oil, the U.S. oil price benchmark, rebounded more than 3% today and crossed $89 per barrel this morning to hit its highest level so far in September.
With fears of a recession looming large, crude oil prices have fallen significantly from their March peak when they hit highs not seen since 2008. Prices of major oil stocks have retraced alongside as investors took some profits off the table after enjoying a rally.
NYSE: OXY
Key Data Points
Investors, however, are refocusing on oil stocks as they expect a tight oil market. This morning, the Energy Information Administration (EIA) reported an increase of only 2.4 million barrels in the U.S. commercial crude oil inventories for the week ended Sept. 9. That compares with an inventory build of 8.8 million barrels for the week ended Sept. 2 -- a data point that sent oil prices and oil stocks tumbling last week. U.S. crude inventories are now roughly 2% below the five-year average for this time of the year, according to the EIA.
The oil markets are banking on the OPEC nations to ramp up production, but despite the production boost in August, it fell short of its production targets.
Meanwhile, the Biden administration is reportedly planning to refill its emergency oil stockpile if crude oil falls to $80 per barrel, according to Bloomberg's latest report. Since President Joe Biden released oil from the Strategic Petroleum Reserve in recent months in a bid to slow oil's unstoppable rally, a potential move to buy oil now to refill the reserves would be a move in the opposite direction -- to prevent any further fall in oil prices.
Overall, with demand still outpacing the supply, economists expect crude oil prices to rebound in the near future. In an interview with Bloomberg yesterday, J.P. Morgan reiterated its oil price forecast of $150 per barrel for 2023.
In its monthly oil market report released on Tuesday, OPEC also projected robust demand for oil in 2022 and 2023, partly because of surging natural gas prices that are forcing nations to switch to oil.
Now what
With oil prices rising on Wednesday and several indicators suggesting further momentum in the coming months, investors saw an opportunity to buy oil stocks after their recent dip. Oil exploration and production companies like ExxonMobil, Occidental Petroleum, and Devon Energy can not only generate higher cash flows with every rise in oil prices, but also pay out larger dividends to shareholders.
NYSE: XOM
Key Data Points
ExxonMobil and Devon Energy, in particular, are among the best oil dividend stocks. While ExxonMobil has increased dividends every year for 39 consecutive years now, Devon Energy's fixed-plus-variable dividend has grown exponentially this year alongside stock prices. Devon stock now yields a hefty 9%.
Of late, Occidental Petroleum has emerged as a promising dividend stock, too, as it hugely boosted its dividend payout this year as its cash flows zoomed. Moreover, with legendary investor Warren Buffett loading up on shares of Occidental, the oil stock has seen strong buying interest among investors every time it has dipped in recent months.
There's another reason why these oil stocks are rallying: With most of these oil majors set to release their quarterly earnings in the coming weeks, the market foresees another strong energy earnings season ahead.
