What happened
Oil stocks were rallying Monday, extending last week’s sizable gains. As of 1:10 p.m. ET, ExxonMobil (XOM 5.90%) was up 5.6% while Chevron (CVX 4.16%) had gained 4%. Smaller drillers like Transocean (RIG 10.69%) and Diamondback Energy (FANG 6.85%) were higher to the tune of 9% and 6.2%, respectively, as the underlying driver of the groupwide rally means even more to them.
That reason? On Sunday, eight members of OPEC (the Organization of the Petroleum Exporting Countries) announced that they will be further cutting their output starting in May, crimping global supply. In response, the market bid up crude prices. As of midday Monday, West Texas Intermediate and Brent were both roughly 6% higher.
So what
In retrospect, the OPEC members’ move is not entirely surprising. The cartel and its close allies have a long history of maneuvering to keep oil prices — and their profits — high. With light sweet crude prices down as much as 40% from June’s peak by late last month, the pump for such a decision was primed.
Leading this charge was Saudi Arabia, which pledged to curtail its production to the tune of 500,000 barrels per day through the end of the year. Iraq’s output will be lowered by 211,000 per day. The United Arab Emirates will reduce its production by 144,000 per day. All told, the nations involved intend to reduce their output by 1.16 million barrels per day for the rest of the year. These cuts are in addition to the 2 million barrel per day cut OPEC announced in October, which likewise is set to run through the end of this year.
For perspective, the U.S. Energy Information Administration reports that worldwide daily production of oil currently stands on the order of 100 million barrels.
Higher crude prices, of course, benefit drillers like Diamondback and Transocean, as well as producers and refiners like ExxonMobil and Chevron.
While the costs of extracting and then refining crude oil into usable gasoline or diesel fuel vary, they are not nearly as variable as the price of crude oil itself. ExxonMobil‘s breakeven price for oil is relatively steady at around $40 per barrel, and its breakeven point is expected to stay around that level for the next several years. In a similar vein, Diamondback’s per-barrel (or barrel equivalent) cash cost during 2022’s fourth quarter rolled in at $10.16, compared to $10.17 per barrel in the prior-year quarter — more or less unchanged despite steep cost increases for most other industries and most other fronts during that time.
Connect the dots: On a dollar-for-dollar basis, any increases in the market price of crude oil almost entirely translate into per-barrel profit growth for energy companies.
Now what
The OPEC members’ decisions will clearly prove beneficial to the bottom lines of oil and natural gas companies. But, in and of itself, this coordinated production cut is not a reason to step into tickers like ExxonMobil, Chevron, or Transocean. OPEC and its allies may or may not stick to their stated plans. They may not need to do so, and may even reverse their plans should the market environment change in a way that favors such a shift.
Still, oil and natural gas stocks like Chevron and Transocean are arguably worth owning here for the bigger reason underscored by OPEC’s move: It’s clear that the world still needs lots of crude oil (100 million barrels per day, according to the U.S. Energy Information Administration), and it’s just as clear that oil-producing nations can and will throttle supply as a means of pumping up its price. This dynamic is apt to remain in place for many, many more years, if not decades.
This content was originally published here.
