The best energy stocks right now as two major conflicts keep oil prices elevated
POWER POINT
What I heard from people in energy
Open. Closed. Down. Above.
This is the recent rhythm of the Strait of Hormuz (SOH). It is also the subsequent movements in crude oil prices.
I’m almost reluctant to write anything concrete here because it may already be dated by the time you read it. But the Power Insider needs to go ‘press’ (so to speak) and so at some point we need to call it out and move forward!
As I wrote recently, every energy investor has to stay. A lot agile these days. The news changes not from day to day but from hour to hour. The fluidity of the situation is clearly visible in the headlines from the US military’s Central Command. Witness these three only on Sunday.
This optimistic post appeared just after 8 a.m. ET on Wednesday.
A few hours later, things got complicated.
Less than 5 hours after that it really picked up speed.
It has become almost impossible to keep up with the speed and direction of the news. In just the last few days, the world has witnessed more Iranian military attacks on ships. two strikes One fatality aboard UAE oil tankers – hits The news about Kuwait, and then the news about President Trump’s proposed 20 percent ‘security fee’, disappeared almost as quickly as it arrived.
Meanwhile, a 20 percent toll on a supertanker full of oil could cost more than $30 million. It would eliminate any profit or economic incentive to move the cargo. This fee was clearly inadequate for most shippers and oil companies. So he disappeared. 20% fee, we hardly knew you!
So where does the oil market stand now? This week on CNBC TV, I laid out both the bull and bear cases for crude oil.
Those who see higher prices ahead point to Iran risk, global stockouts, including the US SPR, and global economies remaining strong. OPEC just released a new economic forecast that maintains its forecast for global growth of 3.2%.
The low price bear camp also points to global storage releases, but ensures the market is well supplied. They also point out the massive decline in Chinese oil demand and the increasingly important Russia story. Ukraine has been hitting Putin’s refinery assets with long-range drone strikes. Damaged refineries cannot process oil. Since this oil cannot be refined domestically, it must be sold on the global market. This is actually increases The availability of Russian oil is helping to ease Hormuz-related supply slowdowns (see RBI below).
The supertanker-sized question many of you may be asking is: When does the price of oil start to meaningfully impact stocks and the macro market?
Oil is already driving up borrowing costs. U.S. 10-year bond yields have risen above 4.6% again, and powerful members of the Fed say we may need a rate hike to stem rising inflation.
This is part of the concise analysis from the team at Deutsche Bank:
“When the Iran conflict began earlier this year, we laid out a framework for thinking about what needed to be done to achieve a meaningful sell-off in risk assets. We highlighted 3 criteria to look for when making a major risk aversion move after the oil shock (e.g. S&P 500 down 15%). Generally, at least one of the following is required:
1. Large and sustained increase in oil prices: An increase of at least +50-100% in oil prices that persists for several months.
2. Hawkish policy response: Shock forces central banks to take sharp, hawkish action to combat emerging inflation (e.g. 1979, 2022).
3. Broader macro damage: The shock is large enough to throw an already slowing economy into recession or cause a meaningful economic slowdown (e.g. the 1990 Gulf War).
“But on all three of these criteria, today’s shock did not meet these thresholds and still does not, even after the recent jump in oil prices.”
Not to be outdone, Seaport Securities strategist Jonathan Golub says the overall stock market is still cheap, in part because earnings estimates continue to rise. It currently has a forward P/E earnings of 19 ½ times the S&P 500. Energy stocks make up just 3% of the S&P 500 but account for 5% of gains. Golub stated that the earnings of energy companies are expected to increase in our Power Lunch program. couple. ExxonMobil, Chevron, ConocoPhillips and others are greatly affected by the rising price of oil; Therefore, as prices rise, earnings estimates also increase. Time will tell whether this earnings optimism will be rewarded; the market will discover in just a few weeks. Circle Friday, July 31st on your calendar!
The news moves fast. Focus. Stay agile. And stay tuned. I feel like the Hormuz headlines aren’t over yet.
SITUATION OF WALL STREET
While many investors are focusing more on the latest developments in Iran, events in Russia are also driving a handful of US energy stocks. Ukraine continues to crush Putin by hitting Russian refineries deep in the country. These drone attacks are increasing the prices of many refined petroleum products such as diesel fuel. The move is one reason stock buyers are flocking to U.S. refining companies. Six stocks continue to hit new highs. PBF Energy (PBF) has doubled in size this year, and Par Pacific (PARR) and Delek (DK) are not far behind.
A big note if you’re considering some of these stocks. A few are at or above the average Wall Street price target. Watch out!
We recently wrote about nuclear energy and how it is returning to growth mode. One of the stocks we discussed was a uranium producer Cameco (CCJ). Truist Securities came out with a positive note on the stock. Truist analyst Christopher Souther initiates coverage of CCJ with a buy rating and a $129 target. That’s a whopping 40% increase from here. Souther says he sees Cameco as “a high-quality, vertically integrated uranium platform with a positive long-term supply-demand outlook and strong positioning to address rising uranium prices.” He also notes that although Cameco has had a “meaningful rerating in recent years,” he thinks contract pricing will improve, leading to a higher multiple.
Speaking of power, let’s talk about Bitcoin-turned-AI power providers like TeraWulf (WULF). Easton, Maryland-based ‘WULF’ is one of a group of companies that started as a bitcoin power provider but has evolved into the power of artificial intelligence. To be clear, these companies – Hut 8 (HUT), Cypher Digital (CIFR) and CleanSpark (CLSK) with TeraWulf – can be lumped together, but they Negative the same. Their models are different and demand that investors view and value them individually and on their merits. However, there is a loose coupling between them in that they all generate power; the power that large data centers and hyperscalers need. These companies make money by signing large, long-term contracts to provide energy. TeraWulf only signed A massive 20-year, $19 billion (or more) deal with Anthropic. CleanSpark just signed its own twenty-year agreement with a major technology customer in Georgia. We talked about this with the CEO on CNBC. And a few months ago Hut 8 inked Its own 15-year, $9.8 billion deal.
Those gains didn’t deter star Morgan Stanley analyst Stephen Byrd. He remains ‘shamelessly bullish’ on many of these stocks. His $72 target for TeraWulf means it will triple from here. It more than doubles its $48.50 target on Cipher Digital. Part of the bullish logic is that these big deals that companies sign should reset their valuations.
RBI → “Bitcoin-to-AI power providers” are so complex that we need to come up with a new name for these companies. We presented this to you at X and you offered some nice and fun ideas. Check this out.
If you’re optimistic about data centers, there’s big(ish) news to consider: New York has become the first state to ban new data centers. At least for a year. You can read more in CNBC’s news. So what to make of this?
TeraWulf CEO Paul Prager gave us a statement about NY’s move against data centers, saying: “The Executive Order should provide greater clarity and provide a logical, practical path forward guided by recognized experts. [Public Service Commission]”Lake Mariner is up and running, fully permitted and on-pace, the gold standard for power-secured, development-ready AI infrastructure,” Prager continued, referring to one of the state’s energy projects. And it’s [the moratorium] “It doesn’t change our expectations for Hawkeye Lake.”
New York is competitive and likes to be first. Let’s see if this power move by the state is the first of its kind in America. Investors are taking note.
TAKE A LOOK
Carlyle’s Jeff Currie explains why you shouldn’t just focus on oil prices.
DOMESTIC
This week’s Inside Line is with David Crane. David is the current CEO of investment platform Generate and has been the CEO of five publicly traded companies and served as the Under Secretary for Infrastructure at the Department of Energy under then-President Joe Biden.
RANDOM BUT INTERESTING
Russia’s energy infrastructure continues to be hit by Ukrainian drones. Ukraine isn’t just hitting small Russian refineries near the border, it’s also hitting major oil facilities hundreds of kilometers inside Putin’s territory. These explosions force Russia to sell that oil on the global market, while pushing up the prices of products that Russia would not be able to produce if a refinery collapsed (think diesel fuel). JPMorgan reveals this in the chart below.
Ukraine attacked Russia’s oil infrastructure to help Keeping prices constant is definitely random but interesting.
