Is it time to stock up on oil stocks? Yesterday OPEC+ announced that they would further cut oil output to 1.16 million barrels daily. This move has surprised the market - again, leading to a jump in Brent crude at 6% during yesterday's trading.
To understand how this impacts investors, let’s first understand what OPEC+ is and how it operates. OPEC (Organization of the Petroleum Exporting Countries) was founded in 1960 and comprises 13 member countries, including Iran, Saudi Arabia, Iraq, Kuwait, and Venezuela. The primary goal of OPEC is to regulate and coordinate with its members their oil production and pricing policies to ensure fair and stable prices in the global oil markets.
In 2016, OPEC joined forces with several non-OPEC oil-producing countries, including Mexico, Russia, and Kazakhstan, to form OPEC+. This alliance was formed to help further manage, and stabilize oil prices and production levels by collectively reducing production when prices were low and increasing production when prices were high. These changes led by OPEC+ oil on production reduction on oil companies have been both positive and negative. On the positive side, the decline in production has led to an increase in oil prices, which has increased the profitability and revenue of many oil companies. This has been particularly beneficial for companies that operate in countries not part of OPEC+, as they are not bound by the production limits set by the alliance and can take advantage of higher prices.
I was looking closely at the impact of these cuts. When OPEC+ announced last October 5, 2022, that they would be cutting production by 2 million barrels per day, the prices of oil companies jumped and started to trend upward. TTE for example, made a price gap days before the announcement and then started to trend upward.
With this market-moving announcement and the current market environment, investors considering participating in this “potential” rally on oil stocks should also consider companies that are not just big players in the industry but also those with consistent, stable dividend income. This income helps offset some of the risks in these very volatile markets. Companies that are known to be Dividend aristocrats are famous for providing a stable and growing dividend stream.
So let’s look at 2 oil companies that could rally following the latest oil cut announcement.
Chevron Corp (CVX)
Chevron Corporation is a multinational energy company founded in 1879. It is headquartered in San Ramon, California, U.S. Additionally, it employs ~43,000 employees (2022).
CVX’s operations are divided into eight segments:
- The Exploration and Production Segment explores new sources and produces and sells oil, natural gas, heavy oil, etc.
- The Refining Segment produces fuel and other automobile products by processing crude oil. These products are sold under the company’s well-known brands, such as Chevron and Caltex.
- The Transportation Segment offers reliable ways to deliver energy to its clients around the globe.
- The Supply and Trading Segment offers financial services for its crude oil and natural gas production operations and its refining and distribution network.
- The Products and Services Segment manufactures safe and dependable consumer fuel products worldwide.
- The Lubricant Segment distributes finished lubricants and specialty oils to global industrial, retail, and marine clients.
- The Chemical and Additives Segment produces and sells various petrochemicals and additives globally.
- The New Energies Segment offers carbon-emission-reduction solutions and technologies to various industries.
Chevron has increased its dividend for 36 consecutive years, and the company is also listed in the S&P 500 index. This has earned the company a place on the coveted Dividend Aristocrats list.
Analyst Rating
Analysts rate Chevron Corp as a “Moderate Buy” based on 6 Strong Buys, 1 Moderate Buy, 8 holds, and 2 Strong Sells. Mean Target is $186.83, and the High Target is $212.00, an upside of 24.74%.
Where is the stock price going?
With yesterday's announcement, Chevron’s stock jumped 4.16%, and the RSI reading shot up to 64.30, putting CVX in bullish momentum territory. Based on historical announcements (like the one from Oct. 5, 2022), investors may see another visit up to the resistance of $189.68. Exxon Mobil Corporation (XOM)
Exxon Mobil Corporation is a multinational energy provider and chemical manufacturer. It is one of the largest publicly traded companies in the world. Exxon and Mobil merged to form the company in 1999, but its history dates back to 1870. It is headquartered in Irving, Texas, employing ~63,000.
The company sells fuels, lubricants, and chemicals under four brands around the world:
The company’s global operations are divided into five sectors: U.S. Operations, Guyana Operations, Qatar Operations, Indonesia Operations, and Papua New Guinea Operations.
XOM has seen an increase in its dividend for 40 consecutive years. That, plus the fact the company is also listed in the S&P 500 index, makes it part of the Dividend Aristocrats.
Analyst Rating
Analysts rate XOM a “Moderate Buy” based on 10 Strong Buys, 1 Moderate Buy, and 6 Holds. Mean Target is $121.85, and the High Target at $148, representing a potential upside of 27.43%.
Where is the stock price going?
Yesterday's announcement created a gap in XOM’s prices which jumped 5.9%, and RSI registered 66.25, indicating a strong burst in momentum and buyer presence. However, investors willing to buy into XOM should be wary of the short-term high at $119.54. In addition, looking at past cuts, XOM tends to trend bullishly after production cuts and then move higher. Investors may see another price breakout if things progress similarly to previous cuts. Due diligence and proper risk management are still suggested.
Final Thoughts
The impact of OPEC+ oil production reduction policies can drive oil companies' share prices. However, these policies can always change based on how OPEC+ sees fit. Investors should always conduct due diligence and proper risk management to protect their investments and mitigate risks.
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