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Why Oil Stocks Are Surprisingly Rallying Today

Motley Fool - Wed Oct 19, 2022

What happened

Oil prices are rising today. West Texas Intermediate, the leading U.S. oil price benchmark, closed up 3% to top $85 a barrel. Meanwhile, the global oil benchmark, Brent, rose over 2% to close above $90 a barrel. That broke a three-day losing streak for crude prices. The rally is a bit of a surprise since it comes on the news that more supply is about to enter the market.

That rebound fueled a rally in oil stocks. Several notable names moved higher on the day, including Chevron(NYSE: CVX), Transocean(NYSE: RIG), and Core Laboratories(NYSE: CLB).

Here's a closer look at why today's oil market rally is a bit of a surprise.

So what

The Biden administration confirmed that it would release another 15 million barrels from the U.S. Strategic Petroleum Reserve (SPR) in response to OPEC's recent decision to reduce its output. That will complete the president's plan to release 180 million barrels from the country's reserve to help drive down oil prices and the pain consumers feel at the pump. The administration also said it could make additional releases this winter. That's one of several options it's considering to push prices down.

Adding more supply to the market typically weighs on prices. However, the market is rallying on this news because it doesn't believe this release will have as much impact since it likely marks the end. Further, the Biden administration has said it would buy oil -- thus removing supply -- if crude prices fall below $72 a barrel. That should put a firm floor under oil prices.

Another factor driving today's rally is new data from the U.S. Energy Information Administration showing a decline in domestic crude and gasoline inventory levels. Oil supply levels fell by 1.7 million barrels, a steeper decline than the 1.2 million barrels forecast. This data suggests oil demand is stronger than expected.

Higher oil prices are great news for Chevron, which is why its stock is rising today. The oil giant has feasted on elevated crude prices this year. It produced $21.8 billion in cash flow from operations in the first half of this year, nearly double 2021's level. While its cash flow likely won't be quite as high during the second half of the year since Biden's SPR releases have helped drive down crude prices, it should still generate a gusher of cash with crude above $85 a barrel.

Along with the SPR moves, the Biden administration is also considering providing oil companies with incentives to boost production, including entering fixed-priced contracts for oil. It wants to encourage the oil industry to drill more wells without worrying that prices could fall due to increased supplies. Increased drilling activities could benefit oilfield service companies like Transocean and Core Labs since it would drive additional demand for their services. That could help bolster their revenue and profits in the future. Both companies have struggled in recent years as oil companies have pulled back on drilling new wells due to lower prices and a shift toward investing in lower-carbon energy sources.

Now what

Oil prices are surprisingly rising today even though the Biden administration plans to release more oil from the SPR. That's partly because demand seems to be holding up. In addition, the administration is looking to eventually replenish the SPR by potentially incentivizing producers to drill more wells and increase their output. Those moves could ultimately benefit the industry by keeping prices high enough to incentivize more drilling, enabling oil companies to continue making attractive profits.

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Matthew DiLallo has positions in Core Laboratories. The Motley Fool recommends Core Laboratories and Transocean. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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