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By Curzio ResearchJune 11, 2024

What OPEC’s production cuts mean for oil stocks

OPEC oil production

Last week, the Organization of the Petroleum Exporting Countries (OPEC) announced it would be extending its deep production cuts.

Specifically, OPEC will extend its cuts of 3.66 million barrels per day (bpd) through 2025 (an extension of a year)… Plus, it will extend its cuts of 2.2 million bpd through September 2024 (an extension of three months).

The move is intended to help put a floor under oil prices amid concerns about slow demand growth, a sluggish economy, and high interest rates.

But so far, it seems to be having the opposite effect…

The price of Brent crude is down around 15% from its April highs.

In this article, we’ll explain why the market is reacting negatively to OPEC’s announcement… and what the news means for the global energy market—and oil stocks—going forward.

Are OPEC’s production cuts bearish?

OPEC’s decision to extend its voluntary production cuts has sent waves through the energy market… 

Despite its intent to help stabilize oil prices… investors seem to be viewing the move as bearish.

The market’s concern comes from OPEC’s plan to phase out its 2.2-million-bpd production cuts between October 2024 and September 2025. 

You see, the plan to bring these barrels back online has yet to be determined—it will be based on what happens with interest rates and economic growth between now and then. If, by August, the fundamental picture looks much worse… OPEC would likely pause its plans for the phaseout.

What’s more, these production cuts are voluntary… which means member countries aren’t strictly required to abide by them. In fact, during the weekend following the meeting, the United Arab Emirates (UAE) raised production guidance.

Put simply, investors don’t like that OPEC isn’t drawing a firm line around its production cuts. They believe the uncertainty will put downward pressure on oil prices.

But that doesn’t mean you should start selling all your energy holdings…

Oil stocks have a ton of upside

Despite the market’s negative reaction to OPEC’s announcement… investors would be wise to maintain their oil exposure.

Put simply, oil stocks have plenty of room to run.

For one thing, despite the global shift to clean energy, the simple fact is that the world is still dependent on fossil fuels, and that won’t change anytime soon. It’ll take years to fully transition to alternative energy sources—and until then, fossil fuels will remain a critical resource.

For another, there are several geopolitical tailwinds supporting oil prices right now—from the Russia-Ukraine war to the conflict in Gaza. Both Russia and the Middle East are historically major global oil suppliers… but the government sanctions in those regions are reducing access to those supplies. And, as we all know, when supplies are harder to come by, it has an inverse effect on demand.

There’s another factor we need to point out: The AI boom. Put simply, the increased tech usage will send energy demand through the roof.

And finally, as we mentioned last week, Big Oil is awash in cash. That means those companies are in the position to weather any up and downs in the oil market.

The bottom line: The pullback in oil creates a buying opportunity for savvy investors willing to look beyond the short-term uncertainties.

If you’re looking to add more energy exposure, consider undervalued stocks with strong balance sheets, low production costs, and successful management teams. You could also look at energy exchange-traded funds, which provide instant diversification across the energy market. 

Or join us at Curzio Research Advisory.

Just today, we recommended a natural gas stock poised to soar as AI sends energy consumption surging…

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