U.S. Crude Oil Storage Levels Are Falling Toward This Critical Level. Here’s What Investors Need to Know
The CEOs of Chevron (NYSE:CVX) and ExxonMobil (NYSE:XOM) have both warned that oil prices aren’t fully reflecting the on-the-ground situation in the oil market. The latest update on that comes from the United States, where U.S. oil reserves are getting dangerously low, with a warning from refiner Phillips 66 (NYSE:PSX) about the issue. What’s going…
The CEOs of Chevron(NYSE:CVX) and ExxonMobil(NYSE:XOM) have both warned that oil prices aren’t fully reflecting the on-the-ground situation in the oil market. The latest update on that comes from the United States, where U.S. oil reserves are getting dangerously low, with a warning from refiner Phillips 66(NYSE:PSX) about the issue. What’s going on and what should investors do now?
Oil is a global commodity
Oil is global, so events in the Middle East affect the rest of the world. Oil exports from the U.S. market rose as flows from the Middle East were constrained, with oil users seeking supplies from wherever they were available. U.S. oil production isn’t directly affected by the war, and the country is one of the world’s largest oil producers, so it was a logical place to look. Companies like Devon Energy(NYSE:DVN) and Diamondback Energy(NASDAQ:FANG) are likely to be net beneficiaries from high oil prices and increasing demand for U.S. oil.
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However, the real risk in the drawdown on U.S. stockpiles is that it can only go on for so long before the high level of exports will likely need to be curtailed. At the end of May, inventory in Cushing, a key U.S. energy hub, stood at 22.4 million barrels, down four million barrels from February. Industry watchers warn that hitting 20 million barrels could pose operational challenges for energy companies.
So U.S. oil is just a temporary solution to the much bigger problem posed by the Middle East conflict. There simply isn’t enough oil to go around right now, which is basically what Chevron and Exxon have been saying. Oil is a commodity, so prices rise when supply is constrained and demand is high.
Emotions are driving the oil market
The problem is that Wall Street is usually driven by emotions over short periods of time. Chevron and Exxon are looking at the bigger picture, with time frames that look out a decade or more. Investors, given the dramatic, rapid swings in oil prices, are watching news from the Middle East conflict and reacting immediately.
Energy industry executives are pretty clear that there is no quick solution to the current oil shortfall. It could take months to resolve the bottleneck in the Middle East, and the healing process won’t actually start until the conflict ends. There’s no end in sight at this point.
Investors should tread with caution. It is tempting to take an aggressive position, betting that oil prices rise materially. That’s what Chevron and Exxon are warning about, after all. Pure-play drillers like Devon and Diamondback would be solid choices in such a scenario.
However, given the disconnect between prices and industry fundamentals, it is also clear that emotions are currently more important than industry fundamentals in the oil market. Given that, it probably makes sense to hedge your bets a little. For most investors, the best option is likely to be integrated industry giants like Chevron and Exxon. They have globally diversified portfolios, exposure across the entire energy value chain, and best-in-class balance sheets. They are built from the ground up to survive the entire energy cycle, as evidenced by each having increased its dividend annually for decades.
Chevron and Exxon are ready for the worst-case scenario
Neither Chevron nor Exxon is likely to be the biggest beneficiary of high oil prices, but they will benefit materially nonetheless. So buying either one will give you good exposure to the upside in oil prices that both companies are warning about. However, they are also well-positioned to deal with low oil prices, which provides investors with an important backstop if emotionally driven oil prices move in unexpected ways.
Given the importance of oil to the global economy, most investors should have exposure to the energy sector. Companies like Chevron and Exxon are solid, long-term choices for that exposure.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Phillips 66. The Motley Fool has a disclosure policy.
U.S. Crude Oil Storage Levels Are Falling Toward This Critical Level. Here’s What Investors Need to Know was originally published by The Motley Fool
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