What happened
Major oil company stocks were on the rise again Tuesday, with Chevron (CVX 0.57%) up 3.7%, Occidental Petroleum (OXY 0.24%) up 3%, and Devon Energy (DVN 0.06%) up 4.4% as of 3:11 p.m. ET.
The move follows yesterday's surge, which was attributed to rumors OPEC+ would consider a production cut of 1 million barrels per day or more. On Tuesday, that figure was raised yet again, causing oil prices to rise for a second day leading up to tomorrow's meeting.
So what
On Tuesday, Bloomberg reported that OPEC+ members were now considering cutting production by as much as 2 million barrels per day. That's an escalation from the figure initially reported by The Wall Street Journal this past weekend, which suggested a cut of roughly 1 million barrels would be considered.
Thus, it's not surprising to see oil prices have another up day, with prices rising another 3% to roughly $86 per barrel as of this writing. Oil prices had fallen from over $120 per barrel in June to below $80 recently, before the large potential production cuts were reported, on fears of a global economic slowdown. It appears as though OPEC+ countries, which depend on oil revenue for their internal budgets, were worried enough to consider large cuts to get ahead of that scenario.
The cuts may have a more muted effect than you might think, however, since several OPEC+ countries have failed to meet their quotas amid supply constraints as well as unrest in certain producer countries. So, some analysts think the actual cuts may be lower than whatever is announced tomorrow.
Now what
Good luck trying to forecast oil prices. The threat of a global recession looms, which could hurt demand. And if the OPEC+ meeting yields fewer than 2 million barrels per day of cuts, that could disappoint oil bulls after this two-day run-up.
On the other hand, other industry leaders have warned that there is very little spare capacity across OPEC+ and throughout the world. Meanwhile, China is still implementing lockdowns and appears to be in recession. If the country ceases its "zero-Covid" policy and reopens more forcefully, demand could climb again. Oh, and the U.S. is supposed to stop releasing barrels from the Strategic Petroleum Reserve (SPR) in November, which could further tighten the market.
Complicating matters is the coming price cap on Russian oil, which G-7 members are looking to implement by Dec. 5, according to one Treasury official, via Yahoo! Finance. A price cap is designed to keep Russian barrels flowing to the global markets, but at a reduced price. That could potentially moderate the price of oil globally. On the other hand, Russia has vowed to withhold oil from any country that agrees to the cap, which could pull barrels off the market, potentially raising prices.
Since it's virtually impossible to predict where prices are going, but since oil and gas prices are so crucial to the health of the global economy, investors should keep their oil and gas stock allocation around a fixed percentage of their portfolio, adding on dips and trimming on big increases above that percentage.
After all, Warren Buffett is doing just that this year, buying large stakes in Both Chevron and Occidental in 2022, substantially increasing Berkshire Hathaway's exposure to the sector in a big way, from relatively low prior levels.
