Oil prices are near their lowest levels all year, reflecting a drop in global demand. What is ahead has investors on edge—and they are betting OPEC and its allies, OPEC+, won’t come to the rescue by cutting production when they meet on Sunday.
If investors are right, oil prices—and stocks—could be in a rut all summer.
Since October, OPEC+ has reduced production by 3.5 million barrels a day, a sizable chunk of the roughly 100 million barrels that the world uses in a day. Nonetheless, the price of Brent oil, the international benchmark, has fallen from $83 a barrel before the October cut to Wednesday’s $72.78, less than 1% above its 2023 lows.
And oil stocks are falling too, with the
Energy Select Sector SPDR ETF
(ticker: XLE) dropping 8.6% in the past month.
Exxon Mobil
(XOM) is down more than 10% in the past month, even after reporting better-than-expected earnings and progress on its projects.
The main problem has been that demand has been falling. China’s rebound from Covid restrictions hasn’t been as strong as some analysts had expected, and economies are sputtering in other parts of the world.
The other problem stems from evidence a key country in the alliance isn’t adhering to announced production cuts.
Russia, which is part of OPEC+, has said it is reducing production by 500,000 barrels a day in retaliation for sanctions related to its invasion of Ukraine. Shipping vessel data tracked by Bloomberg indicate that Russia’s crude production hasn’t fallen off—in fact it appears to have risen. That raises the prospect that Saudi Arabia and other major oil players will press Russia to actually reduce production, which itself would be tantamount to a new cut.
But RBC Capital Markets analyst Helima Croft doesn’t expect other OPEC members to get into a dispute with Russia over production. The last time that happened, in 2020, a supply glut led to prices dropping fast.
Croft writes that OPEC has an incentive to cut production more and prop up prices, and she thinks it is more likely than not that they will. The fact that OPEC is meeting in person—as opposed to remotely—is a sign that they are predisposed to make a more active decision, she writes.
It is also clear the market isn’t betting on that outcome. Eventually, OPEC’s hand may be forced regardless—though it could take even lower prices to force the cartel to get more aggressive.
“The oil market is not pricing in additional OPEC production cuts, but ironically, the lower prices go, the more likely OPEC will be to announce a cut,” writes Raymond James analyst John Freeman.
Write to Avi Salzman at avi.salzman@barrons.com
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