The Country Caller explains the reason behind recent surge in Chesapeake Energy’s stock and expects the sustainability in rally
Chesapeake Energy Corporation (NYSE: CHK) stock has appreciated by 6.14% year-to-date. More interestingly, the stock’s performance in past week has been mouthwatering as it has surged by over 8% in past five days of trading. The reason behind the recent rally is none other than the recent spike in crude prices.
After trading at lower levels of around $30 a barrel this year, the NYMEX crude oil prices have settled above $50 a barrel mark for the first time since July last year. Currently, the U.S. benchmark for crude West Texas Intermediate (WTI) trades at $51 per barrel, while the Brent Crude trades at $52.13 a barrel.
Moreover, natural gas prices are also on a rise as it currently trades at $2.50 per Million British Thermal Units (MMBtu), up by 0.89%. On back of the recovery in crude oil prices, along with announcement of amendment in credit facility earlier this year, investor’s confidence in the company is increasing and the stock is heading northwards. In addition, the initiatives undertaken by Chesapeake, such as asset divestiture, lowering of debt burden, are likely to further benefit it in future.
Will The Rally Sustain?
The obvious answer to whether the rally in company’s stock would sustain is that more or less it depends on the commodity prices, which in our view, are expected to go higher. The reason behind the optimistic expectation is that regarding supply and demand, both ends for oil markets are positive. When talking about the supply, the logistics disruptions from Nigeria, Venezuela, and Canada are lowering the oil production and countering the increased production from Iran.
Yesterday, American Petroleum Institute stated that crude oil supplies have declined by 3.6 million barrels for week ending June 3, 2016. When discussing the demand side, the ‘India’ factor is adding to global oil demand. According to International Energy Administration (IEA), growth in India’s oil demand has surpassed than that of China.
The Chinese demand for refined fuels in Q1 of this year declined to 353,000 barrels per day, which was almost 60% lower than its higher demand of 900,000 barrels a day in 3Q last year. Contrary to this, India’s demand for the liquid fuels surged by 400,000 barrels a day in the first quarter.
Hence, we remain optimistic on oil prices, and hence expect the rally in Chesapeake Energy to sustain.