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What The OPEC, OPEC+ Deal Means For Oil Investors

Wayne Duggan

On Monday, OPEC reached a deal to extend its crude oil production cuts until March 2020. On Tuesday, Russia and nine other non-OPEC oil producers also reached a deal to cap oil production in an effort to support crude oil prices in a softening global manufacturing environment.

The Numbers

Production cuts from OPEC and non-OPEC partners — collectively referred to as OPEC+ — come in response to booming production growth in the U.S.

The U.S. has now surpassed both Russia and Saudi Arabia as the world’s biggest oil producer. As a result, the global market has become oversupplied, and OPEC+ has cut about 1.2 million barrels per day of production to support prices.

At the same time the U.S. is producing a record amount of oil, the JPMorgan Global Manufacturing PMI has dipped to its lowest level since 2012, a sign that oil demand could be slowing.

Analyst Reacts

Bank of America Merrill Lynch analyst Doug Leggate said in a note that the global oil environment is far from ideal for U.S. oil investors, but the market is already pricing in an extreme amount of pessimism when it comes to oil stocks.

“While still early, we believe industry commitments to capital discipline are really leaving the U.S. on the cusp of a transition to more measured growth that can coexist with OPEC and begin to address fragile market confidence that oil can be sustained above levels currently discounted across the U.S. oils,” he said Tuesday. 

U.S. unconventional oil growth is only about 180,000 bopd so far in 2019, the analyst said, adding that he expects U.S. onshore oil growth of 700,000 bopd in 2019 and again in 2020, but growth could slow to just 200,000 bopd in 2021.

Bank of America has named Hess Corp. (NYSE: HES) as its top U.S. E&P stock and Exxon Mobil Corporation (NYSE: XOM) as its preferred oil major play.

WTI crude oil prices fell 4.59% on Tuesday to $56.38/bbl following the OPEC news.

Bank of America isn’t expecting much of a rebound in the second half of the year, forecasting average fourth-quarter prices of around $56/bbl.

So far in 2019, the United States Oil Fund LP (NYSE: USO) is up 22.6% overall.

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Latest Ratings for HES

Date Firm Action From To
May 2019 Upgrades Neutral Buy
May 2019 Upgrades Underweight Equal-Weight
Apr 2019 Downgrades Buy Neutral

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