Five Energy Stocks That Should Win Big With Higher Oil And Gas Prices

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The major stock indices fell immediately after the market opened on Tuesday, with the S&P 500 down 1%, the Dow Jones Industrial Average off by less than 1%, and the Nasdaq Composite declining more than 1% in early trading. However, as has been the case for much of this year, energy stocks are holding up better than the broader market.

The recent decision from OPEC+ to slash oil production by 2 million barrels a day has put the threat of $100 oil back on the table for this year. One analyst suggested we could even see $110 oil before the year is done, and if he’s correct, here are five companies that could benefit.

OPEC+ Slashes Production

In an email on Monday, Craig Erlam of OANDA noted that oil prices continued to move higher at the beginning of the week after a big move last week. Brent oil wasn't far from $100 after OPEC+ announced plans to cut its output target by 2 million barrels a day.

In an email on Friday, Erlam's OANDA colleague, Edward Moya, reported that crude prices held onto most of last week's OPEC+-driven gains after the non-farm payrolls report showed that the labor market remained robust but with signs of cooling. However, he also had a warning for consumers as winter approaches in the northern hemisphere.

"OPEC+ showed their cards [last] week, and that will keep oil markets very tight as we approach winter," Moya added. "OPEC+ has done whatever it takes and is now awaiting to see what the reaction will be from world leaders. The risks of $100 oil are easily back on the table, and if it is a cold winter, we could see $110 before the end of the year."

On Tuesday, recession fears increased, pressuring oil prices as the OPEC+ news started to wear off. The International Monetary Fund slashed its forecast for the global economy again, warning that "the worst is yet to come, and for many people, 2023 will feel like a recession."

The IMF now expects global growth to decline to 2.7% next year and assigns a 25% probability of it falling below 2%. The agency projects growth of 3.2% for this year. 

The IMF's warning comes after JPMorgan Chase CEO Jamie Dimon warned that a "very, very serious" combination of headwinds would probably tip the U.S. and global economies into a recession by mid-2023.

Specifically, he pointed to impacts from runaway inflation, larger-than-expected interest rate hikes, and unknown impacts from Russia's war in Ukraine and quantitative tightening around the globe.

These Five Energy Companies Could Win Big 

However, no matter what the economy does, people still need to put gas in their cars to go to work and pay for natural gas to heat their homes. Thus, it's no surprise that energy stocks have held up better than most of the rest of the market. 

For example, Occidental Petroleum Corporation (OXY) has more than doubled year-to-date as it stands as a significant beneficiary of soaring oil prices. Occidental was one of the top three holdings in Engine No. 1's Transform Climate ETF when it launched earlier this year. The ESG-focused fund made a name for itself with a big win against Exxon Mobil with a minuscule stake.

Engine No. 1 CEO Jennifer Grancio told CNBC last week that Occidental more than doubled this year "because it is different from peers." She sees the company as a leader in the transition from traditional to green energy. Of note, Warren Buffett also took a massive stake in Occidental Petroleum.

Meanwhile, Exxon Mobil Corp (XOM) has climbed more than 50% year-to-date as it's practically a poster child for oil and gas. The company is also a strong dividend play, having boosted its dividends annually for the last 39 years. TipRanks has a "Moderate Buy" rating on both OXY and XOM.

For a broader exposure to the energy market, Phillips 66 (PSX) could be an attractive play. The stock is up more than 20% year-to-date. Phillips 66 specializes in downstream energy like refining, giving it exposure to prices at the gas pump, but it also holds some midstream assets. TipRanks rates the company as a "Strong Buy."

Shell PLC (SHEL) should also benefit from rising oil prices, although it has only gained 14% year-to-date. The company also invested in a renewable hydrogen plant in the Netherlands, so it adds some green energy exposure to a portfolio in addition to its traditional energy exposure. 

One midstream play that investors might consider is DT Midstream Inc (DTM), which has gained more than 12% year-to-date. The company transports natural gas for utility companies, power plants, large industrial customers, and energy producers in the southern, northeastern, and midwestern U.S. and Canada. TipRanks has a "Strong Buy" rating on both Shell and DT Midstream.

Final Thoughts

There are plenty of potential beneficiaries of higher oil and gas prices in all parts of the energy sector, so these five are just a handful of the options.

Chevron (CVX), which has gained more than 30% year-to-date, BP plc (BP), which is up 11%, and Marathon Petroleum (MPC), which has climbed 60%, are also worth looking at. The independent hydrocarbon exploration firm Devon Energy Corp (DVN) has also had an excellent year with a more than 50% gain.

It's pretty challenging to pick a loser in the energy sector this year, but as always, investors are advised to do their due diligence before investing. With all the gains that this sector has already seen, it's important to realize that these stock prices will stabilize at some point. When that happens, you don't want to be the one who buys high and then is forced to sell low. 

However, with oil and gas prices so high, there could still be room to run on many of these names.

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