Energy markets are once again gripped by uncertainty after OPEC+ oil cartel members failed to agree on a plan to increase crude oil production. For investors, including those in related stocks, this means confusing signals about the outlook for the commodity that is so crucial to the global economic recovery after a deadly pandemic.
have gained nearly 60% this year, fueled by a surge in demand as economies reopen after vaccine rollouts. As demand moves closer to pre-pandemic levels, the Organization of the Petroleum Exporting Countries and its allies, collectively known as OPEC+, failed in its third attempt to resolve a deadlock over oil production, following Saudi Arabia. and the United Arab Emirates, two major exporting countries. countries, failed to overcome their differences.
WTI Weekly Chart.
"The result is a significant failure for the producer group," according to a Bloomberg report.
“Relationships between two core OPEC members have soured that no compromise was possible. It damages the group's self-image as a responsible steward of the oil market, and heightens the specter of the destructive internal price war that caused unprecedented price swings last year.”
Exxon Mobil Weekly Chart.
Uncertainty in the oil markets is challenging investors in the largest US energy companies, including Exxon Mobil (NYSE:) and Chevron (NYSE:), which are just recovering from last year's slump in oil prices and are recovering their balance sheets
Chevron Weekly Chart.
Brent raises $100?
While the possibility of a price war within OPEC cannot be ruled out if this dispute continues, many equity analysts are becoming optimistic about their favorite oil stocks. They see oil prices gaining further momentum due to growing demand coupled with supply constraints – a combination that is very healthy for corporate profitability.
Bank of America, for example, expects to reach $100 a barrel by the summer of 2022, and the company is underperformed for a single stock in its oil hedging universe.
Brent Oil Futures Weekly Chart.
In a note cited by CNBC, Evercore ISI said it is optimistic about the outlook for oil companies. The company recently raised its price target for every stock in the universe of its integrated oil and exploration and production company.
The note read:
"After most of three years of cost cutting, high-quality portfolios and value proposition rethinking, E&Ps are well positioned to take advantage of the commodity price advantage in the near term."
Despite this bullish sentiment, we are hesitant to advise investors to increase their exposure to oil stocks after OPEC failed to increase production. In our view, it will be difficult for the cartel to raise the price of oil to the point where it will hurt global economic growth, especially as inflationary pressures mount.
With that, oil-producing countries will have to face political pressure from the US and other major economies not to increase production if they have a lot of spare capacity. The US has pushed the cartel to strike a deal that could allow production to rise and cool the price rise.
"Administrative officials have been in contact with relevant capitals to push for a compromise solution that would allow for the proposed production increases," a White House spokesperson reported Monday.
Starting point
The OPEC+ deadlock is undoubtedly a bullish signal for oil stocks in the near term. However, we do not advise investors to increase their energy exposure when markets are in limbo and there is a real possibility of price wars.
