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How Will the OPEC Supply Cuts and Brazil's Entry Impact Oil?

In a bid to counter falling oil prices, the Organization of the Petroleum Exporting Countries and its allies (OPEC+) led by Saudi Arabia and Russia have announced plans for an additional 1 million barrel cut to daily production. This move supplements an earlier cut of equal size that was set to expire, signaling a commitment to stabilize prices. However, these reductions are voluntary and raise questions about their sustainability. The surprise move by major producer Brazil to join the cartel next year was another talking point.

Despite OPEC+ announcing nearly 2 million barrels per day (bpd) of cuts, American benchmark prices fell by over 2% yesterday. The voluntary nature of the cuts left investors nonplussed. Further, the cuts, while substantial, include extensions of existing curbs by Saudi Arabia and Russia, leaving the market seeking stronger commitments.

According to us, any weakness in oil allows long-term-oriented market participants to buy shares in quality companies at attractive prices. As it is, the commodity is still trading above $75 per barrel — a healthy enough level for market participants. As such, investors interested in the sector could benefit from having quality stocks like Suncor Energy SU, EOG Resources EOG and Murphy Oil MUR.

OPEC Action Failed to Prop Up Prices

As prices at U.S. gasoline stations keep on sliding to an average of $3.25 per gallon, OPEC+ strives to address economic challenges and fears of flat oil prices without further output caps. Despite the latest reduction, analysts remain cautious, pointing to global economic uncertainties, expanding production capabilities outside OPEC, and abundant oil inventories. As a matter of fact, the price of WTI crude fell $1.90, or 2.4%, to $75.96 per barrel in response to news of the voluntary cuts.

Brazil’s Entry Makes Things Challenging

In a surprising development, Brazil has joined OPEC+, a move that adds complexity to global oil dynamics. The South American nation, a potential partner for the United States in efforts to influence gasoline prices, has aligned with OPEC+, which already controls 40% of the world's oil supply. This decision poses a setback for U.S. attempts to keep pump prices down and reflects a significant market power victory for OPEC+.

OPEC Grappling With Several Complex Questions

Internally, OPEC+ faced challenges in reaching a consensus on voluntary cuts due to tensions among member nations. Externally, a glut of oil in the market, driven in part by increased U.S. production — currently the highest on record — presents a hurdle. China's economic struggles further dampen global demand forecasts. Despite OPEC+'s efforts, the road to higher oil prices seems uncertain amid these challenges.

Investor Considerations

Having gone through the OPEC+ decision, investors interested in the energy space might consider the operators mentioned below. Each of these companies currently carries a Zacks Rank #2 (Buy).

You can see the complete list of today’s Zacks #1 Rank stocks here.

Suncor Energy: SU beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters at an average of 15.7%.

Suncor Energy is valued at around $42.5 billion. SU has seen its shares move down 4.3% in a year.

EOG Resources: EOG Resources beat the Zacks Consensus Estimate for earnings in three of the last four quarters and missed in the other. EOG has a trailing four-quarter earnings surprise of 9.2%, on average.

EOG Resources is valued at around $72 billion. EOG has seen its shares drop 9.6% in a year.

Murphy Oil: Over the past 60 days, Murphy Oil saw the Zacks Consensus Estimate for 2023 move up 11.5%. MUR beat the Zacks Consensus Estimate for earnings in each of the last four quarters, representing an average surprise of 13.4%.

Murphy Oil is valued at around $6.7 billion. MUR has seen its shares lose 8.5% in a year.

Last Words

While OPEC+ attempts to stabilize falling oil prices through voluntary cuts and welcomes Brazil into its fold, the road ahead remains uncertain. Given the unpredictable nature of the oil market, a balanced and informed approach will position investors to navigate potential challenges and capitalize on opportunities.

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EOG Resources, Inc. (EOG) : Free Stock Analysis Report

Murphy Oil Corporation (MUR) : Free Stock Analysis Report

Suncor Energy Inc. (SU) : Free Stock Analysis Report

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