What happened
Shares of large-cap oil and gas producers Chevron (CVX 1.27%), Occidental Petroleum (OXY 1.23%), and Devon Energy (DVN 0.44%) were in rally mode today, up 5%, 5.4%, and 7.9%, respectively, as of 11:24 a.m. ET.
While many stocks were higher today, oil and gas stocks were particularly strong ahead of the upcoming OPEC+ meeting this week.
Over the weekend, The Wall Street Journal reported OPEC+ participants would discuss production cuts at the upcoming meeting to offset falling prices, with the potential for a surprisingly large cut in the offing.
NYSE: OXY
Key Data Points
So what
On Wednesday, the heads of OPEC+ will meet in Vienna, Austria, the first time participants are meeting in person since the pandemic. Ahead of the meeting, some delegates told The Wall Street Journal that participants will consider a cut of over 1 million barrels per day, with others saying there would be fierce debate on the level of cuts in a range of 500,000 to 1.5 million barrels. At the last meeting this summer, OPEC+ cut production only slightly, by 100,000 barrels per day.
The U.S. Energy Information Administration projects global oil demand was 99.4 million barrels per day in August. While the cut amounts to a little over 1% of total demand, small changes in global oil supply and demand can go a long way in moving prices. As we've seen this year, the Biden administration's release of 1 million barrels per day from the Strategic Petroleum Reserve (SPR) has played a part in oil prices coming down in recent months.
Oil prices were down in the low-$80 range before today from over $120 as recently as June. The lower oil prices have come as the Federal Reserve has hiked interest rates very fast, which has several negative effects on oil. First, many investors are worried the Fed is going too far with its rate increases, and that it will usher in a global recession that would sap oil demand. Second, the value of the dollar against other currencies has been rising along with U.S. interest rates. Because oil is priced in dollars on the international markets, a stronger dollar also lowers the price of oil, all else being equal.
A lower oil price also stands to diminish the revenues of big oil producers such as Saudi Arabia and Russia, which are leading members of OPEC+. The pending OPEC+ discussions will likely have a political undercurrent as well, as oil revenues help fuel Russia's war against Ukraine. Delegates told the WSJ that Russia is pushing for the larger cuts.
Any OPEC+ cut will further tighten supply and help stem a decline in oil prices amid a potential recession. That helps the stock of any company affected by the price of oil.
Devon is likely up more than Chevron and Occidental because it's a pure shale explorer and producer. Chevron and Occidental are more diversified, with Occidental having a large chemicals segment and Chevron having both midstream and downstream operations. Since Devon is the most levered to oil prices, it stands to gain the most from the potential production cuts.
Additionally, last week it was reported that Warren Buffett's Berkshire Hathaway (BRK.A 0.20%) (BRK.B 0.26%) purchased even more shares of Occidental Petroleum stock on Sept. 26 and Sept. 28. Buffett has been buying Occidental all year, and Berkshire's ownership in this energy stock surpassed 20% in early August. Some analysts believe Berkshire is moving to potentially purchase all of the company, as Buffett actually prefers owning whole businesses.
Now what
The U.S. is supposed to stop releasing barrels from the SPR after this month, so oil prices could remain somewhat resilient for the rest of the year, even if we have some sort of economic slowdown.
Oil and gas stocks still look attractive at least as a portfolio diversifier, since energy prices have such a large effect on the overall economy. Furthermore, many oil and gas companies now pay very large dividends, as they have done a good job controlling supply and then rewarding shareholders with dividends and repurchases instead of plowing capital back into growth.
We'll see what OPEC+ decides on Wednesday, but the outlook for oil and gas shareholder payouts got a little brighter today.
