Why Occidental Petroleum and Other Oil Companies Rallied Today

Key Points

• Ukraine has started attacking Russian oil and refining assets with more aggressiveness.

• The change in the dynamic of the war caused oil prices to rise,

• Occidental and other U.S.-based oil companies rallied in response, given their domestic status.

• 10 stocks we like better than Occidental Petroleum ›

Shares of Occidental Petroleum (NYSE: OXY) rallied 5% on Tuesday as oil prices rose.

One of Warren Buffett's two favorite oil companies along with Chevron (NYSE: CVX), Occidental was rising along with oil prices, which were up strongly due to new developments in the Russia-Ukraine war and its potential effect on Russian oil supply.

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Occidental is a "made in America" oil play

On Tuesday, oil prices were up 2% due to ongoing concerns over Russian oil supply. This was due to revelations that Ukraine has increased drone attacks on Russian oil refineries with some effect. Today, it was reported that Russia's Transneft pipeline is now limiting the amount of oil its state-backed oil companies can store at its storage facilities due to the attacks. Of note, Russian oil refining has fallen below five million barrels per day, the lowest since April 2022.

Prior to this, oil prices had fallen 9% this year back to the $60 range, a far cry from the $139 price at its 2022 peak shortly after Russia's invasion of Ukraine. Off that much lower price, oil companies have tended to trade cheaply. However, if Ukraine is now more willing -- and more allowed by its allies -- to more forcefully go after Russia's oil assets and disrupt global supply, that could change the dynamic to a higher fuel price.

In addition, the Federal Reserve is set to meet today and tomorrow, where it's expected the central bank will cut the federal funds rate in response to tepid, recent job numbers. Lower interest rates, all things being equal, tend to increase economic activity and therefore oil demand.

Image source: Getty Images.

Buffett's oil bet: A hedge against geopolitics?

Traditional energy companies have lost their luster over the past three years ever since the commodity price spike in 2022. However, being out of fashion hasn't deterred Warren Buffett from allocating over 11% of his stock portfolio between Chevron and Occidental as of the last quarter.

The big reason for the large oil stake is Chevron and Occidental's large inventory bases in the U.S. and other friendly countries. And while some have posited that oil demand will peak at the end of this decade, that doesn't mean oil won't be in demand for decades to come. Meanwhile, large geopolitical events have the potential to disrupt supply at unpredictable times, which makes these stocks nice hedges against other parts of the portfolio -- all while paying dividends along the way.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.