After underperforming this spring, the energy market is heating up again and may just end up stealing the thunder from other sectors this summer. With that said, let’s take a look at the mounting evidence of a return to strength in the oil patch and two oil pipeline stocks that are poised to benefit from that strength.
Crude oil future prices dropped 17% from an April peak around $88 a barrel to a low earlier this month at $73. A persistently strong U.S. dollar (in which oil is priced) and above-normal oil production last month from top supplier Russia combined to push prices lower.
However, Russia recently announced its intention to resolve the issue of its overproduction in June, while the 13 member countries that comprise OPEC+ have just agreed to extend deep oil output cuts into 2025.
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At its June 2 meeting, OPEC+ agreed to extend the cuts of 3.7 million barrels per day (bpd) by a year until the end of 2025, while extending the cuts of 2.2 million bpd by three months until the end of September 2024. The move represents an attempt by the group to counter high interest rates and rising U.S. production.
The commitment to further production cuts was a reason for the sudden reversal higher in oil prices this month, as was increasing confidence that global oil inventories will trend lower in the coming months in the northern hemisphere. Other contributing factors include simmering tensions in the Middle East, as well as strengthening gasoline demand in the U.S. as the traditional summer “driving season” gets underway.
Yet another reason that possibly explains the rebound in the crude price is the admittedly arcane—yet well-established—connection between gold and oil prices historically. I drew attention to this in a Cabot Wealth Daily post last month, when I mentioned a 2017 research paper by energy economist Muhammad Shahbaz, who demonstrated a positive price correlation between gold and oil prices more than 80% of the time over the last half century.
Moreover, the respected market technician Tom McClellan drew attention to this phenomenon when he noted gold’s price movements are normally echoed in oil prices after a lead time average of about 20 months. It was further mentioned last time that this gold/oil price “echo,” if it holds true this time around, should begin sometime during the June-July period. And would bring us to where we are now.
The oil bulls are clearly making a fresh charge at regaining control of the short-term trend, as the daily chart below shows. And if the historical tendency mentioned here fully kicks in this summer, there should be plenty of buying opportunities in the currently beaten-down oil/gas production and exploration stocks.
But during the early stages of a market reversal, it’s usually best to concentrate on energy stocks that have already established a large degree of forward momentum and relative strength (as these tend to be the early beneficiaries of broad oil price strength). That said, here are a couple of leaders in the presently strong pipeline transport industry worth a closer look.
2 Oil Pipeline Stocks Showing Strength
Tulsa-based ONEOK (OKE) is a leading midstream service provider and owner of one of the nation’s premier natural gas liquids (NGL) systems, with an extensive network of natural gas assets, plus 2,200 miles of crude pipeline. The company recently agreed to purchase a 450-mile NGL pipeline system from Easton Energy in a strategic energy region of the U.S. Commenting on the deal, ONEOK’s management said, “This strategic acquisition provides the quickest pipeline connectivity to and within the critical supply and demand centers for our NGLs, refined products, and crude oil assets in the Gulf Coast.” It’s further expected the deal will allow ONEOK to reduce costs and, significantly, expand its cash flow, while supporting a potential increase of its already enticing 4.9% dividend.
Houston-based Genesis Energy (GEL) provides critical pipeline infrastructure supporting world-class developments in the Gulf of Mexico, owning approximately 450 miles of pipeline located in Texas, Louisiana, Alabama, Florida and Mississippi. It’s a small, but growing, outfit compared to other pipeline companies, having recently laid a new deepwater 105-mile pipeline in the Gulf, while extending another key pipeline along the Outer Continental Shelf to deliver crude oil from deepwater oil fields to markets on the Texas Gulf Coast. Collectively, these two contracted developments and their combined almost 200,000 barrels of oil per day of incremental production handling capacity are expected to expand the company’s throughput volumes. Significantly for investors, Genesis believes the projects will begin paying off in a big way next year as the firm anticipates harvesting increasing amounts of free cash flow driven by both earnings growth and materially reduced growth capital expenditures.
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