OPEC’s meeting in Vienna on Friday could push oil prices lower as the group is expected to raise output, but the effect on stocks remains mixed.
Sources with OPEC told Reuters that production is expected to increase by 1 million barrels per day, which is equivalent to 1 percent of global supply.
The two-day meeting of the major oil producing countries will decide how much output will be increased. This could affect the stocks of major U.S. oil companies which have produced more crude oil recently.
“The meeting is the cartel’s most anticipated one since November 2016 when it reached a deal with selective non-OPEC producers to collectively cut production by 1.8 million barrels per day through the end of the year in 2018,” says William Featherston, a Credit Suisse analyst, in research note on June 18.
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This meeting does not have the general consensus among the countries that OPEC has seen in the past.
“Importantly, OPEC needs a consensus of all members to officially change its output policy, leading some to believe it may end in a ‘broken meeting’ like June 2011,” Featherston says.
The market expectations are for OPEC and Russia to add around 1 million barrels per day since Venezuelan production has been falling faster than expected and renewed U.S. sanctions on Iran could lower its oil exports, Featherston says.
The energy sector is likely to “re-gain positive momentum” since the institutional investor base is generally underweight energy stocks globally, he says.
“Our view is that equities reflect an oil price below what is reflected in the 2019-20 futures curve,” Featherstone says.
Wall Street has likely priced in the impact of OPEC’s decision ahead of the meeting, says David Beard, director of research and lead E&P analyst for Coker Palmer Institutional in New Orleans.
“Much of the fear seems priced in,” he says. “We have been calling for a selloff into OPEC, but perhaps there will be a relief rally right around the meeting as it is likely that the news will not be as bad as the bears fear.”
Based on the Chicago Mercantile Exchange’s OPEC Watch Tool on Thursday, which uses a variety of signals from its crude oil options markets, the probability of a wind down in the supply deal was 17 percent, the probability that the deal remains largely unchanged was 63 percent and that supply will be tightened was 19.5 percent.
The market could also react, depending on the contentiousness of the meeting, says Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University’s Cox School of Business in Dallas.
“To a certain extent, the meeting is priced in to stocks, but if the conflict between the Gulf States and Iran spills out into the open, we may see some volatility in prices and equities,” he says. “Most anticipate there will be no agreement on raising or lowering production. It’s doubtful an agreement can be hammered out either way.”
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An upward pressure remains on crude oil prices because withdrawal by the United States from the agreement with Iran has not played out, Bullock says.
One likely scenario is that OPEC reaches a compromise of adding 750,000 barrels a day to start in January, which would have minimal impact on crude oil prices of 1 to 2 percent, says Patrick Morris, CEO of New York-based HAGIN Investment Management.
“What I don’t know is if the Russians are going to cheat their asses off,” he says.
Since many of the oil company stocks are lagging earnings, if the market reacts negatively to the decision, it will provide a good buying opportunity for investors.
“They will drop on any increased output and more than they should at probably 2.5 times what the commodity actually settles out at,” he says.
Geopolitical concerns could put downward pressure on both crude oil prices and stocks. Venezuela is unable to raise output and is relying on boosting revenue from higher oil prices while Iran cannot benefit from foreign investment and expertise now because of the sanctions, which hampers its ability to increase output, says Ethan Bellamy, a managing director who covers energy stocks at Baird, a Milwaukee-based investment bank.
Heavyweights like Saudi Arabia and Russia have spare capacity and could benefit from lower quotas, “which could be justified by the ongoing slide in Venezuelan production, the attacks in Libya and a robust demand environment,” he says.
The two most powerful oil barons in the world — Vladimir Putin of Russia and Mohammad bin Salman, the crown prince of Saudi Arabia — will likely get what they are seeking, which is higher production than the current levels.
“We think Trump’s call into the kingdom to contain a sharp oil-price rally, particularly ahead of U.S. elections this fall, carries some weight,” Bellamy says. “We wouldn’t be surprised to see a rise in output now, followed by ratcheting down again in December once the political stakes of higher fuel prices lessen.”
Another major consideration is that a silent member has joined OPEC — Permian pipeline constraints.
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“OPEC may feel emboldened to raise output given the chokepoints for the premier U.S. oil province that won’t be addressed in the near term, allowing OPEC and Russia to regain market share losses,” he says.
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How OPEC Could Impact Energy Stocks originally appeared on usnews.com
