Just a month after raising oil production by 100,000 barrels per day, OPEC is set to make a U-turn toward August production levels via a token production cut of the same volume throughout October. The decision will most likely have a positive impact on oil stocks like Schlumberger (NYSE:SLB) and Hess Corporation (NYSE:HES).
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Why Is OPEC Cutting Oil Production?
Until a few hours ago, OPEC was expected to keep oil production steady this year, partly due to the resistance from Russia against an oil production reduction and partly because the cartel agreed to raise production by 100,000 barrels just last month. It turns out that the OPEC did, after all, defy Russia in a surprise move.
Russia, which is selling its oil to Asian countries at discounted rates after being shunned by the West, had strongly opposed the production cut, arguing that oil-consuming countries will immediately assume that the cuts are due to a supply surplus in the world. This sentiment can damage Russia’s leverage with its Asian buyers.
However, OPEC has a wider view in mind, which drove the decision. Last week, in a meeting, OPEC discussed the implications of a demand drop fueled by recession and another unpredictable bout of COVID-19 lockdowns in major nations. The group predicted that for the rest of this year and the next, the world is expected to experience a supply surplus of about 900,000 barrels a day as a result of the demand slowdown. Thus, a cut in production makes sense to reduce this surplus.
Coming to why this production target is critical to determining global oil prices, the United States Energy Information Administration reveals that OPEC members constitute about 40% of the world’s crude oil production. Additionally, export volumes from OPEC members make up about 60% of the total internationally traded petroleum. The sheer dominance in the market leads OPEC’s production decisions to influence oil prices.
Other Developments in the Oil Sector
Apart from the supply-trimming move by OPEC, another hope at better global oil supply was stymied when plans to revive the West’s 2015 nuclear deal with Iran, in which sanctions of the latter country would be lifted to allow oil trade, ran into a complication.
Last Friday, the White House denied Iran’s request for a closure of investigations by the U.N. nuclear watchdog. This means that the West has to wait longer for the U.S. and Iran to arrive at a mutually beneficial agreement before Iran can begin exporting oil again and improve global supply.
Back home, a Wall Street Journal research also found out that the Biden administration has leased out the lowest area of land for oil drilling during the President’s first 19 months in office. This reduces the chances of the U.S. becoming self-reliant in producing oil.
Not to mention, the Russia-Ukraine war shows no sign of stopping soon, sustaining the global shortage of gas supply.
Overall, lower production of oil both internationally and domestically puts the responsibility of meeting domestic oil demand on the shoulders of a handful of companies. This opens up solid opportunities for the following oil stocks.
Hess Corporation (NYSE:HES)
Global energy company Hess Corporation primarily engages in the exploration, production, refining, and marketing of crude oil, natural gas liquid, and natural gas. Tailwinds in the energy sector this year have led to the HES stock appreciating about 59% year-to-date.
Moreover, during the second quarter, Hess also brought 50 wells, demonstrating its efforts to increase production. The company expects to ramp up its production rates in the Bakken region to about 200,000 barrels per day by 2024.
Is HES Stock a Buy?
Barclays analyst Jeanine Wai recently maintained a Buy rating on the stock, saying that the initial concerns that the Alternative Minimum Tax will adversely impact oil exploration companies that are considered to be tax “safe-havens” are proving to be useless. This is because, despite the tax, companies like Hess are comfortably maintaining strong cash flow yields.
Wall Street has a firm conviction that Hess has a long road uphill ahead. HES stock enjoys a Strong Buy consensus rating based on eight Buys and one Hold. On average, Hess’ target price stands at $140.22, indicating an upside of 16% from current price levels.
Schlumberger (NYSE:SLB)
Oilfield services company Schlumberger’s technology and solutions for the production, drilling, and processing of crude oil and natural gas has served the oil and gas industry for 96 years. Exploration and offshore activity have picked up pace in recent months, keeping the demand for the company’s offerings steadily high.
The company recently increased its full-year revenue expectations on the back of likely traction in a multi-year upcycle.
Further, in its commitment to environmental cleanliness, Schlumberger introduced its new business in March, the Schlumberger End-to-end Emissions Solutions, whose technology will help the oil and gas industry achieve methane-free oil production. This has garnered the interest of environmentalist investors recently.
Moreover, as the global shortage of gas triggers more production activities in domestic exploration companies, the demand for Schlumberger’s technologies is likely to remain high.
Is SLB Stock a Buy or Sell?
In July, Evercore ISI analyst James West reiterated a Buy rating on SLB stock and raised the price target to $54 $51. In addition, the Wall Street consensus is bullish on SLB, with a Strong Buy rating supported by 11 Buys. Schlumberger’s stock price prediction points at an average price target of $50.82, which indicates upside potential of 33.49%.
Conclusion: Oil Will Always Get Back Up on Its Feet
Presently, the commodities market is volatile, with a lot happening in the oil and gas sector. The oil supply crunch that is pushing oil prices up (further fueling global inflation) might be having a positive effect on oil stocks now. However, experts are of the opinion that if a recession hits, the economy will take oil demand down with it. This might pose as a near-term concern for oil companies. However, going by history, oil demand always manages to regain its strength.
The world still has a long way to go before the automobile sector and other oil-guzzling industries can fully replace oil with alternative forms of energy. Thus, it can be safe to say that fundamentally strong oil companies like Hess and Schlumberger can make for good long-term investment choices.
