The crude oil price has risen by 30% since last Monday, 11 May. The easing of restrictions across large swathes of the world has raised hope of gradual increases in demand. Chinese oil demand, in particular, has risen to pre-pandemic levels.
Moreover, the Saudi Arabia-Russia crude oil price feud has come to an end. Add to this the positive news related to a potential COVID-19 vaccine and oil and gas investors believe they can breathe freely again.
The damage has been done, however. On Monday, the US Energy Information Administration stated that US shale oil production would drop by record levels in June. Well economics and the continuing ravages of the coronavirus continue to batter the industry. While this is unfortunate for US shale oil producers, it will likely drive further short-term rises in the crude oil price on futures contracts.
Who stands to gain?
The Santos Ltd (ASX: STO) share price has already jumped by 11% this week since Monday. At present, Santos’ price-to-earnings ratio (P/E) is still at 10.26. I believe this is still a reasonable ratio given the company is very well managed. It has a strong LNG hedge and is targeting break-even cash costs of less than the current crude oil price.
The Origin Energy Ltd (ASX: ORG) share price has had an upward burst of 5% since Monday. Origin recently announced a strategic move to structurally lower operating costs. It also has a $100 million additional cost out program in place and has defensive qualities as Australia’s largest gas retailer. At a P/E of 9.84, this is 6 points below its 10-year average.
As with Origin, the Woodside Petroleum Limited (ASX: WPL) share price has jumped up 6% since Monday. The largest of the 3, Woodside has a current P/E of 39.53 reflecting the company’s forward growth plans. This is lower than the company’s 10-year average P/E. However, it doesn’t matter so much with Woodside. The market clearly sees this company as a growth opportunity.
In truth, Australia owes a debt of gratitude to the Woodside management teams over the past 2 decades in particular. After inventing the LNG industry in Australia, this company is the driving reason why our country has become the world leader in LNG production in January of this year.
While oil price futures have started to rebound significantly, this is somewhat divorced from the reality of the physical oil market. The world still has a glut of oil. Moreover, the US is still far from pre-pandemic activity.
Since March, trying to forecast market trends is a fool’s errand. Nonetheless, positive sentiment within the market is likely to continue the crude oil price rise at least over the remainder of May, possibly into early June. Even so, of the 3 major energy ASX shares I favour Santos. It benefits directly from a higher oil price; far more than Woodside or Origin.
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Motley Fool contributor Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.