Pro Perspectives 8/26/20

August 26, 2020

The hurricane in the Gulf of Mexico has been upgraded to a category 4. That will make landfall tonight.

We've talked about this storm, and the resulting supply disruption that may prove to be a catalyst to get oil prices moving.

What oil and gas companies would benefit from higher oil prices? All of them.

Remember, we came into the year with a bubbling confrontation with Iran and with a U.S. economy that was positioned for the hottest stretch of growth in two decades. It was a formula for $100+ oil. And that backdrop would have solidified the comeback and sustainability of the shale industry. And then the rug was pulled out — from the events you can see annotated in this chart …

This plunge in oil prices put practically everyone on default watch: the energy industry, banks that lend to the energy industry, countries that are heavily dependent on oil revenues (and everyone that deals with these entities, relies on them as part of their business or daily lives, lends money to them, etc — i.e. makings for a total global meltdown).

With that, if there was any question about whether or not policymakers would/should fire the bazooka of monetary and fiscal stimulus, the collapse in oil made it an easy decision.

As part of the policy mix, the Fed brought the U.S. energy industry back from the brink of death by becoming an outright buyer of corporate bonds. So, these distressed companies have been able to raise money, to stay afloat, now they need higher oil prices.

And with the exception of a position Carl Icahn has (and has had) in Occidental Petroleum, no one has these stocks. Wall Street has left the industry for dead. That probably makes these U.S. oil and gas stocks a buy.