What happened
Shares of large-cap oil and gas companies, including Warren Buffett holdings Chevron (CVX +1.49%) and Occidental Petroleum (OXY +3.38%), along with shale pure-play Devon Energy (DVN +1.36%), were up strongly on the week, rising 12.4%, 14.7%, and 20.1%, respectively, through Thursday.
After oil stocks fell in September on mounting recession worries, OPEC+ surprised the markets this week with a larger-than-expected coordinated production cut. That was enough to send oil from roughly $80 a barrel to begin the week to close to $90 on Thursday, lifting these three oil-sensitive stocks along with it.
NYSE: CVX
Key Data Points
So what
On Wednesday, members of OPEC+ agreed to a 2 million barrel-per-day production cut, which was larger than expected and in defiance of U.S. calls to continue producing amid global inflation challenges. While the decision is politically fraught, as it is seen by some as helping Russia at the expense of the U.S. and other Western nations, the lower supply is a positive for oil producers such as these three stocks.
For its part, Saudi Arabia's officials say the move is needed to balance the market that may be headed for a global economic slowdown. However, limiting production will also help Russia receive a higher price for oil to continue its war efforts. In December, the G-7 may implement a price cap on Russian oil, and Europe is likely to ban Russian imports. Thus, the production cut could keep prices higher for Russian oil than they otherwise would have been.
Devon is likely up more than Chevron and Occidental as a pure shale exploration and production company, whereas Chevron and Occidental likely saw more tempered gains due to their diversification in downstream refining and chemicals activities, which aren't as sensitive to oil prices. Still, each stock was up strongly, as much of their profits continue to be dependent on the long-term price for oil and natural gas.
In another bit of potential good news for Chevron, the Biden Administration announced it was looking to ease Trump-era sanctions on Venezuela, to help offset the OPEC+ cuts. Those sanctions prevented any U.S. company from operating in Venezuela, and prevented key chemicals needed for production from being sent there. Chevron had been a large participant in the Venezuelan market, and took a $2.6 billion charge in 2020 when the sanctions were implemented. While restarting operations in the country would be challenging amid crime and infrastructure challenges, it could be a positive for Chevron to potentially regain some value from those written-off assets.
Image source: Getty Images.
Now what
Oil prices face a number of cross-currents these days, as bearish rising interest rates and the threat of a global economic slowdown run into the potentially bullish OPEC+ cuts, fears of constrained global supply, and the potential cessation of the U.S. releasing barrels from the Strategic Petroleum Reserve (SPR) in November.
Of note, the Administration said it would be looking at a host of options to counteract the OPEC+ supply cuts, so there could be more announcements in the coming weeks on measures aiming to lower prices again.
Amid this volatility, investors with diversified portfolios should probably have some traditional oil and gas exposure, given its importance to global economic growth. Moreover, most major oil producers now pay out a good amount in dividends and implement share repurchases, as the industry seems to have agreed to limit supply growth across the board.
While volatile, this week's gains show how oil and gas stocks can be a valuable portfolio diversifier.
