Why Oil and Gas Stocks Rallied Today

Shares of major international oil and oil-related stocks such as TotalEnergies (NYSE: TTE), APA (NASDAQ: APA), and oil tanker company Torm plc (NASDAQ: TRMD) rallied on Monday, with the stocks up 2.6%, 4.4%, and 3.4%, respectively, as of 12:45 p.m. ET.

TotalEnergies has made strides to become more diversified into renewables, but it still gets over half its operating income from oil and gas upstream production. APA is primarily an upstream oil and gas explorer. And Torm is an oil and gas tanker company involved in global oil and gas transport.

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Today, oil and gas prices had a "relief rally," as the past weekend's OPEC+ cartel announcements of supply increases weren't as large as feared. Furthermore, Ukraine's daring strike against Russia's bomber fleet over the weekend could potentially escalate the war with Russia, throwing into question Russia's supply on the markets once again.

OPEC+ acts as expected; Ukraine surprises Russia

Over the weekend, the OPEC+ cartel announced it would increase oil supply for the month of July by 411,000 barrels per day, an amount in line with expectations. Going into the weekend, some had feared OPEC+ would announce a larger increase.

The OPEC+ countries had agreed to voluntary cuts in the neighborhood of 2.2 million barrels per day in January 2024 in order to support oil prices amid stalling growth and growing U.S. production. But in April, the cartel announced it would phase out those voluntary cuts, despite oil prices having fallen this year. While some had feared a bigger surge of production more quickly, it appears the cartel will be phasing in those supply increases more gradually.

Additionally, oil prices can surge higher whenever there are geopolitical tensions in oil-producing states. In today's case, it's Russia. We all remember the big surge in oil prices back in 2022, in the aftermath of Russia's invasion of Ukraine. While oil prices have come down this year on the back of tariff-related fears, and perhaps the Trump administration's more Russia-friendly stance leading to sanction relief, Ukraine's daring strike on Russia's long-range bomber fleet this past weekend has raised the prospect of a bigger Russian response.

If Russia responds in a big way, it runs the risk of encountering even more sanctions, both on itself and other countries that buy oil from Russia. Russia is the third-largest producer of oil, supplying about 12% of global oil supply. So with that supply now somewhat in question after the past weekend's attack, that's also contributing to the oil price rise.

Image source: Getty Images.

Why is OPEC+ increasing production in the first place?

It might seem odd that OPEC+ is increasing production, even though the price of oil has declined in the new year amid the prospect of a macroeconomic slowdown caused by the Trump administration's tariff war.

There are potentially several reasons for this. First, some OPEC+ countries were cheating on their quotas anyway, so this is Saudi Arabia's way of punishing them. Second, Saudi Arabia might be trying to curry favor with the Trump administration, which wants lower oil prices and inflation.

Third, Saudi Arabia may be moving to a price war strategy to force lower production in U.S. shale, given that Saudi Arabia has the lowest costs per barrel in the world. We actually saw this in the early days of the pandemic, when Saudi Arabia increased oil production even though the world was going into lockdowns, in an effort to bankrupt U.S. shale companies.

While today's situation isn't as dire as that, the pivot to competing on price is still not a welcome development for most oil companies.

Therefore, today's price increase might end up fleeting, as more production comes online and tariff uncertainty weighs on economic activity.

That being said, oil and gas stocks could serve as a valuable hedge against a broader Russia-Ukraine war or increased geopolitical turmoil. So they serve as a valuable component of a diversified portfolio in that respect. Moreover, many oil and gas stocks also pay hefty dividends along the way, while also functioning as a portfolio hedge against that scenario.

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Billy Duberstein and/or his clients have positions in TotalEnergies. The Motley Fool has positions in and recommends Apa. The Motley Fool has a disclosure policy.