What happened

The energy sector lifted the markets higher on Wednesday, with oil and gas stocks soaring yet again. Some of the lesser-known oil and gas stocks were making the biggest moves as of 2:45 p.m. EDT, including:

  • Tellurian (TELL): Up 13.2%.
  • SM Energy (SM 0.37%) : Up 12.3%.
  • Centennial Resource Development (PR -0.14%): Up 6.7%.
  • NGL Energy Partners (NGL 0.85%): UP 12.9%.
  • Range Resources (RRC 0.64%): Up 9.3%.
  • Antero Resources (AR 1.49%): Up 8.9%.

So what

Prices of oil and natural gas are on a stellar run, and there appears to be no stopping them.

As of this writing, natural gas prices are up 3.5% after popping more than 6% in early morning trading, while the price of West Texas Intermediate (WTI) -- a U.S. oil price benchmark -- was trading up 3%.

With those gains, WTI's price has shot up nearly 17% from its Aug. 20 lows, while natural gas prices have jumped an astounding 39% over the period. The stunning rally in prices has set oil and gas stocks on fire, and it may not fizzle out just yet.

A person pointing at price charts on a screen with oil rigs in the background.

Image source: Getty Images.

Fears of a shortfall in oil and gas production -- even as demand continues to rise -- were looming large since Hurricane Ida slammed the Gulf of Mexico a couple of weeks ago. The American Petroleum Institute (API) confirmed those fears with its weekly inventory report released on Sept. 14: Crude oil stocks declined by 5.4 million barrels in the week ended Sept. 10 compared with a forecast drop of 3.9 million barrels. API reported a drop of roughly 2.9 million barrels in the previous week.

Just the other day, the Organization of Petroleum Exporting Countries (OPEC) projected demand for oil to cross pre-pandemic levels in 2022.

Fear has gripped the natural gas market even harder given supply disruptions during the peak inventory buildup season ahead of the winter months. Natural gas inventories in the U.S. came in 16.8% lower year over year in the week ended Sept. 9, according to the U.S. Energy Information Administration (EIA).

The tight oil and gas markets have triggered strong interest in energy stocks as investors expect oil and gas companies to make more money with every rise in price. Investors also expect these companies to use the incremental cash to shore up balance sheets and reward shareholders more aggressively. Stocks that are waiting to offload debt before focusing on shareholder returns are getting more attention right now. 

TELL Chart

TELL data by YCharts

For example, investors in Antero Resources are anticipating a dividend and share repurchase program in the coming months based on the oil and gas producer's financial goals. Antero is prioritizing a stronger balance sheet and targeting a debt level of $2 billion before it returns any capital to shareholders in the form of share repurchases or dividends. Until last quarter, the company expected to hit that target by early 2022, but that's likely to happen even earlier given the exponential rise in natural gas prices.

Likewise, management at Range Resources -- a top player in the Marcellus shale gas play – also stressed last quarter how it intends to return cash to shareholders once it brings down its debt to comfortable levels in the coming quarters.

For Tellurian, the surge in natural gas prices is divine timing as its profitability and ability to build the Driftwood LNG export terminal in Louisiana depend a great deal on liquefied natural gas (LNG) prices. LNG demand is nearing record levels on supply constraints from Europe and Asia, with spot LNG prices hitting record highs even as I write this.

SM Energy even got a stamp of approval from JP Morgan on the morning of Sept. 15 when analysts at the firm upgraded their rating on the stock to overweight, with a price target of $27 a share, representing 33% upside from the stock's closing price Tuesday.

Now what

Oil and gas prices will likely sustain momentum until production along the Gulf Coast returns to normal, and that should keep oil and gas stocks buzzing. For now, keep an eye out on two important indicators expected this week:

  • Any potential disruption in the Texas energy hub from tropical storm Nicholas.
  • The EIA's weekly natural gas report coming up tomorrow, Sept. 16.

These should give you an idea about production and inventory levels, and how they could affect the oil and gas industry.