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Why Oil Stocks Are In Rally Mode Today

Motley Fool - Wed Sep 28, 2:53PM CDT

What happened

Oil prices bounced higher on Wednesday. WTI, the main U.S. benchmark price, was up 4.5%, closing back above $80 a barrel after a recent dip into the $70s.

That rebound in oil prices fueled a rally in oil stocks. Notable names on the upswing today were Chevron(NYSE: CVX), Devon Energy (NYSE: DVN), Phillips 66(NYSE: PSX), and Energy Transfer(NYSE: ET). Here's a look at what's fueling the oil market's rebound and how it impacts these companies.

So what

Oil prices are getting a boost today from government data and Hurricane Ian. The Energy Information Administration (EIA) reported its weekly inventory data showing a 200,000-barrel build in oil stockpiles. That's half what analysts expected and well below the more than 1.1 million-barrel inventory increase last week. It suggests that demand remains healthy.

Meanwhile, oil producers in the Gulf of Mexico, including Chevron, shut down about 11% of the region's output ahead of Hurricane Ian. That will result in a temporary curtailment of about 190,000 barrels of oil per day. With less supply flowing into the country, inventory levels could be under pressure next week.

On the one hand, the temporary production shutdown will slightly impact Chevron's production and earnings in the current quarter. However, if higher oil prices persist, the company could see a boost in the future.

The company cashed in on surging crude prices during the second quarter. Its earnings rocketed nearly 300% as oil soared into the triple digits. With its cash flow rising and falling with crude prices, a rebound in oil prices would enable it to make more money in the future.

Devon Energy has also been generating lots of cash, thanks to higher oil prices this year. The company's operating cash flow more than doubled, while its free cash flow hit a record in the second quarter. That gave Devon the cash to buy back shares, pay a massive dividend, and make another sizable acquisition.

Devon pays a variable dividend of 50% of its free cash flow each quarter. Because of that, higher crude prices will have an immediate impact on shareholders.

The EIA's data was also good news for oil refiners like Phillips 66. The report showed a 2.4 million-barrel drop in gasoline inventories and a 2.9 million-barrel decline in distillates (i.e., kerosene, jet fuel, and diesel).

Estimates called for a 700,000 barrel build in gasoline inventories (on top of last week's nearly 1.6 million-barrel rise) and a slight decrease in distillate levels, which grew by 1.2 million barrels last week. These numbers suggest that demand for refined petroleum products is improving, which could boost Phillips 66's earnings in the future.

Finally, today's uptick in oil prices is also lifting the fortunes of Energy Transfer, a large master limited partnership (MLP) focused on transporting and storing oil and other energy commodities. While it makes most of its money via stable fees from customer contracts, it does have some volume- and commodity-sensitive businesses. With oil prices rising and inventory levels falling, more volume could flow through its midstream network in the future, which would boost its cash flow.

Now what

After a red-hot start to the year -- fueled partly by Russia's invasion of Ukraine -- the oil market has cooled down in recent weeks on macroeconomic concerns. While the worries of an economic downturn (which would likely dent crude demand) haven't gone away, this-week's government data suggests oil and refined product demand remains strong.

That's giving oil stocks a nice boost today. If future data stays positive, oil prices and stocks could keep rallying.

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Matthew DiLallo has positions in Energy Transfer LP and Phillips 66 and has the following options: short October 2022 $8 puts on Energy Transfer LP. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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