Stock Analysis & Ideas

Traders Hit the Gas Pedal on Oil Stocks as OPEC+ Convenes

Story Highlights

Even on a downbeat day for the financial markets, oil stocks are on a slippery slope to higher price points, as some petroleum-producing nations are preparing to tighten the taps.

Today, I have a good-news, bad-news scenario to report. The good news is that the share prices of oil stocks, including Exxon Mobil (NYSE:XOM), Occidental Petroleum (NYSE:OXY), and Indonesia Energy (NYSE:INDO), are rising. The not-so-good news for U.S. gasoline consumers is that OPEC+ convened today in Vienna, Austria, and decided to reduce their oil production. In light of this development, I am bullish on oil stocks.

Exxon Mobil and Occidental Petroleum are U.S.-based oil and natural gas producers, while Indonesia Energy is (of course) based in Indonesia. However, their businesses are often impacted by events that take place many miles away.

Such is the nature of the oil trade: Geopolitical events and agreements between nations can drastically alter price dynamics, and domestic producers can’t always control these market forces. The net effect can, as in the current instance, be higher prices at the gas pumps for consumers and sudden share-price moves for oil-stock investors. Whether that’s a good thing or not depends on your point of view and whether you’re positioned to profit from the opportunity.

Oil-Stock Traders Prepared for Production Cuts – and Got Them

This morning, financial-market traders knew that OPEC+ nations, which include not only Middle Eastern countries but also Russia, were set to meet today. It wasn’t a question of whether these countries would cut back on petroleum production but how much they would tighten the tap, so to speak.

The markets tend to be efficient and forward-looking, so traders braced for a worst-case scenario this morning by pushing up the share prices of oil drillers like Exxon Mobil, Occidental Petroleum, and Indonesia Energy. Yet, there was still the unanswered question of how much OPEC+ would cut back on oil production. Would it be a reduction of 1 million barrels per day, 2 million barrels, or some other amount?

Let’s put this in context. As many as 100 million barrels of oil per day are consumed globally. A daily production reduction of 1 million barrels would be problematic; cutting back 2 million would be even more impactful.

Unfortunately for gasoline consumers in the U.S., the worst-case scenario actually happened. Reportedly, OPEC+ agreed to reduce oil production by 2 million barrels per day, which translates to 2% of global demand.

Some commentators might feel that OPEC+ nations, including Saudi Arabia, the United Arab Emirates, and Russia, were using the sizable oil-production cut as a political weapon against the U.S. and Europe. However, United Arab Emirates Energy Minister Suhail al-Mazroui vehemently denied this motive, however, saying, “The decision is technical, not political,” and “We will not use it as a political organization.”

Oil Jumped on the News and So Did Oil Stocks

As you might expect, oil futures traders pushed the WTI crude price higher even before the OPEC+ meeting ended. Oil’s forward momentum continued throughout the day as traders learned that OPEC+ would implement a major petroleum production cut.

Experts on Wall Street reacted to this development, with some of them anticipating a potentially swift and decisive response from the U.S. government. Citigroup (NYSE:C) analysts, for example, posited that “There could be further political reactions from the U.S., including additional releases of strategic stocks, along with some wildcards including further fostering of a NOPEC bill.”

In a similar vein, JPMorgan (NYSE:JPM) analysts expect the U.S. government to implement countermeasures, specifically to reduce oil stocks. However, none of this deterred oil-stock traders from scooping up shares of petroleum drillers today.

Starting with the undisputed heavyweight champion of American oil firms, Exxon Mobil stock moved 4.5% higher by 1:00 p.m. Eastern time today. That’s quite impressive, considering the major stock-market indices were in the red.

Meanwhile, Occidental Petroleum stock, a Warren Buffett favorite, gained 2%. That’s not too shabby since so many large-cap stocks in other sectors were down for the day.

The loudest buzz on social media, however, surrounded Indonesia Energy stock. As the shares soared 17%, INDO stock’s trading volume was already double the usual daily amount.

Are Oil Stocks a Good Investment in 2022?

So, let’s see how the experts feel about some of the more popular oil stocks. First, XOM has a Moderate Buy consensus rating based on eight Buy and three Hold ratings. The average Exxon Mobil price target is $109.05, implying 9.4% upside potential.

Next, analysts collectively determined that OXY is a Moderate Buy based on five Buys, seven Holds, and one Sell assigned in the past three months. The average Occidental Petroleum price target is $76.67, implying 13.3% upside potential.

In addition, Wall Street has decided that INDO is a Moderate Buy based on one Buy rating. This one analyst has an Indonesia Energy price target of $11, implying 32.1% upside potential.

Conclusion: Consumers Won’t Like Production Cuts, Oil Stock Investors Will

It’s understandable if U.S. gasoline consumers aren’t too happy about the large petroleum production cut. It’s likely to push already-high inflation even higher for a while. Some investors, however, are enjoying windfall profits today. As OPEC+ nations reduce their oil output, domestic drillers are bound to benefit, and – like it or not – that’s bullish for oil stocks in 2022’s final quarter.


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