Oil Prices Could Jump in December. Energy Stocks Should Get O il prices have had a quiet November, holding steady around $90 per barrel. There’s a good chance the calm won’t last. A new set of sanctions from Europe will ratchet up the pressure against Russia and could upend oil markets around the world.
Citi, which has had one of the lowest price targets for oil among the major banks this year, now sees higher prices ahead, with oil averaging $97 per barrel in the fourth quarter, and $95 in the first quarter of 2023. Others are eyeing even higher levels, with some options traders making a long shot bet that crude could get to $200 by March 2023. That almost certainly won’t happen—it would take simultaneous supply and demand shocks to do it—but it does show just how much sentiment has shifted.
Natural gas should benefit from a similar dynamic over the next few months, as strong global demand and the continued disruption of Russian exports keeps prices high.
“Market participants shouldn’t get complacent about the recent moderation in natural gas and oil prices,” Citi analysts warned in a recent note.
For investors, elevated oil and gas prices should make energy stocks attractive for the next few months. In particular, U.S. shale drillers could become even bigger players in the global market as oil importers look for new suppliers. Among the companies that could benefit is Houston producer EOG (EOG).
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T hose companies won’t have to do anything special beyond executing on their current plans to profit in the next few months. The difficult choices and volatility are happening overseas. Europe plans to not only ban Russian oil shipments by sea on Dec. 5, but also put a price cap on the oil that Russia exports elsewhere to deprive Russia of some of its oil riches.
Before the war, Europe imported some 1.5 million barrels a day by sea from Russia. That has declined to less than one million barrels, but the shipments are still a key part of the 100 million-barrel oil market. The barrels that Russia sends elsewhere are an even bigger part of the market. Before the war, Russia exported about five million barrels a day of crude and three million barrels of oil products globally.
To impose the price cap on shipments to other countries, the EU and other developed economies are relying on ship insurers and other service providers to turn away buyers who won’t agree to the terms. One important question is whether Russia will be able to continue exporting as much oil by ship without the services provided by European companies. A factor that “many market participants do not realize” is that the price cap could disrupt many more barrels than Europe’s import ban, wrote RBC Capital Markets analyst Helima Croft in an email to Barron’s.
“It is not just the 1.5 million barrels per day into Europe,” Croft wrote. “India may not be able to continue Russian purchases at current levels without western underwriting services.”
Russia has also previously said it won’t sell to buyers who abide by the cap, potentially setting up a showdown. What’s more, Europe is planning to ban oil products like diesel from Russia starting in February, which could cause another price spike. Diesel is in particularly short supply now, because too few refiners have been making it.
The U.S. shale drillers are insulated from much of the geopolitical intrigue but are bound to benefit from it. Citi recommends EOG, among other stocks, because it considers the Houston producer to be a “high-quality growth name.” EOG announced this week that it’s expanding its oil and gas production into a new basin in Ohio, making it one of the few producers that’s adding significant new acreage. Most public companies are likely to grow production by 5% or less next year, but EOG is forecasting low double-digit growth in oil and gas production.
The company has proven it can be efficient. EOG’s return on capital in the latest quarter was 26%, putting it near the top of the industry. Shares are up 56% this year but still trade at just 9.3 times its expected earnings over the next four quarters, and the company just boosted its dividend by 10%. The dividend yield is 2.3%
U.S. producers will be called upon this winter to help Europe win an economic war against Russia. It’s a role some companies are in a particularly strong position to play.