What happened
Monday dawned bright for investors in the American oil and gas sector, as shares across the industry, from producers Occidental Petroleum (NYSE: OXY) and Devon Energy (NYSE: DVN) to refiner Marathon Oil (NYSE: MRO) reacted positively to news of oil production cutbacks at OPEC.
As of 10:15 a.m. ET, Occidental shares are up 5.8%, Devon is gaining 6.4%, and Marathon is leading the whole pack higher with a 9.4% gain.
So what
OPEC — or more precisely, the expanded OPEC+ group that includes major oil producer Russia — announced yesterday that its member nations will be cutting oil output by nearly 1.2 million barrels per day (bpd), beginning in May. Russia and Saudi Arabia will account for the bulk of the production cuts, tightening their respective oil spigots by 500,000 bpd each, and these cuts will remain in place through the end of 2023.
Oil prices responded sharply to news of the planned cuts, with the cost of a barrel of West Texas Intermediate (WTI) crude oil surging 6.3% to over $80 a barrel, and Brent crude, the international benchmark, rising 6.2% to nearly $85 a barrel. More expensive oil means more revenue — and profit — for producers like Occidental and Devon, which easily explains why those shares are rising today. Refiners like Marathon are a bit trickier to trade, as on the one hand they will need to pay more for the oil that is their input product. On the other hand, though, they can be expected to apply a profit margin when refining that pricier crude oil into usable petroleum products such as gasoline.
Thus, farther down the supply chain, companies like Marathon may also benefit from OPEC’s action.
Now what
And investors may benefit as well.
After all, Devon shares cost only 7.3 times earnings currently, and Occidental and Marathon stocks look even cheaper at valuations of just 4.7 times earnings and 4.2 times earnings, respectively. All three companies have had their valuations depressed by fears that a weak global economy will be made even weaker by ongoing banking crises — resulting in slower economic growth and less demand for oil over the coming year. (Although Occidental has benefited from interest from Warren Buffett, who seems to have a contrary view.)
And now investors are seeing higher prices on what oil is still being pumped — thanks to OPEC — which could mean that profits won’t be as depressed as investors were worrying about. Indeed, with some analysts now predicting oil prices could top $100 on a revival of demand from China’s reopening economy, there’s even the possibility that oil profits will grow this year, and not merely avoid shrinking.
I’ve said it before and I’ll say it again: Now might be an excellent time to start thinking about investing in oil stocks.
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