Oil Stocks Have Jumped. This Is the Case for More Gains.

Healthy demand for goods and service is behind that. Markets expect consumer spending to keep rising, which would mean more demand for oil. And central banks are certainly not destroying demand by lifting interest rates. In fact, they are more likely to cut rates soon, which would free up money for spending. 

The supply of petroleum, meanwhile, has generally been lower than those hoping for higher oil prices have feared. Less oil has been added to U.S. crude stockpiles than expected in the majority of weeks this year. Now, U.S. stockpiles are at just over 440 million barrels, about flat for the year and down from just over 470 million a year ago, according to the U.S. Energy Information Administration. 

Several factors indicate the price of oil could easily keep rising. 

For starters, oil’s technical trends look encouraging. At its current level, the price is inching closer to breaking above the midpoint of the range between about $66 and $120 it has held since March 2022. Any move into the high $80s would make $100 look more realistic. 

That lines up with news about production around the globe. Russia, for one, said in March that it plans to cut oil production by about 471,000 barrels a day, which would bring the country’s daily output to about 9 million barrels before the second half of the year. Commodity strategists at

J.P. Morgan

estimate that total global production of oil should grow at a percentage in the low single digits for all of 2024, while demand rises a tick faster. Oil could hit $100 by September, wrote Natasha Kaneva, the head of global commodities research at J.P. Morgan.

That type of gain would bring oil stocks upward. Higher oil, of course, means higher revenues for producers, assuming the amount they are pumping remains more or less stable. 

Even if the price of oil doesn’t rise, the stocks could gain. If the price remains roughly where it is for long enough, analysts would assume higher oil prices going forward. That would imply larger revenues and earnings. 

Since the start of this year, the consensus calls for 2024 aggregate sales and earnings for the companies in the oil stock fund have fallen modestly, according to FactSet, even while the price of oil has gained. Part of the reason is that analysts and companies don’t adjust their forecasts every day as commodity markets fluctuate.

That could turn out to be positive. Right now, Devon Energy, for example, is assuming an oil price of $75 in its profit guidance. But if analysts assume that oil will remain at $83, about 11% higher, sales estimates should rise by roughly the same percentage.

Profit forecasts—key for any stock—could rise even more because a large portion of the companies’ costs don’t change very much. Increases in expected sales usually translate into even larger boosts to forecasts for earnings. 

“We remain biased toward the oily names, as we see more structural support for oil prices,” wrote Gabriele Sorbara, analyst at Siebert Williams Shank, adding that his current oil price and profit forecasts are likely conservative.

Finally, oil stocks re simply cheap. The oil fund trades at just under 13 times the consensus forecast for earnings per share over the coming twelve months, while the

S&P 500

is at almost 21 times. The fact that an uptick in the price of oil could generate larger-than-expected profits makes them an even better bargain. 

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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