The decision by OPEC to reduce oil production by 2,000,000 barrels per day has not been well received by the White House. The move is likely to cause gas prices to rise, which will not be appreciated by consumers.
However, there is one winner from the whole ordeal: Oil stocks.
What’s the deal? The major oil producers, including Russia and Saudi Arabia, announced Wednesday their largest production cuts since the outbreak of the pandemic. Although the reduction of about 2% of world oil demand won’t take effect until November, prices saw an immediate increase.
After the announcement, oil prices reached three-week highs. Brent crude oil, which is the international benchmark for oil, hovered just below $95 per barrel on Friday morning. This was an increase of about 6% from Monday.
As a result, US oil and gas stocks are thriving. The S&P 500 Energy sector, which includes stocks such as Exxon Mobil (XOM), Chevron(CVX), and Phillips 66 (6PSX), is up almost 15% this week. However, the overall index is only 3.7%.
Because supply cuts translate into higher profits for energy companies. Stephen Ellis, a Morningstar senior analyst, stated that this will result in higher oil prices and greater cash flows. He stated that the production reduction will result in higher dividends and stock purchases among energy companies.
Energy companies have had an extraordinary year so far.
Exxon Mobil has increased more than 60% in the past year, Halliburton is up almost 25%, and Occidental Petroleum is up 127%, thanks to Warren Buffett’s Berkshire Hathaway, (BRKA), dramatically increasing its stake. For the same period, the S&P 500 has fallen by 22%.
The big picture: As supply shortages increase crude oil prices, energy companies in Europe and the United States have made staggering profits.
Exxon’s profit, exempting special items, was $17.6 Billion in the second quarter of 2022, an increase of 273% over the previous year. Chevron’s second-quarter profit also rose 277% over the previous year.
These profits have been used largely by energy companies to reward and attract shareholders, making their stock even more appealing. Major oil and gas companies plan to repurchase shares at near-record levels this year. Bernstein Research estimates that the seven largest companies in oil and gas, which include Exxon Mobil (BP), Chevron (BP), Shell (SHLX), and Chevron (BP), will return $38 billion to shareholders this year through buybacks. This would almost quadruple the $10 million in buybacks that were completed in 2021.
Quincy Krosby is the chief global strategist at LPL Financial. He stated that companies are now more focused on shareholders. The sector is now being rewarded. Analyst consensus is that clients should consider investing in these companies even if they are sold.
The bottom line: The stock market was saved by the energy sector in the second quarter. It appears that it will do the same for this quarter. The OPEC announcement could be the turning point in 2022 as a big energy year.
Here comes unemployment
As they wait for the Bureau of Labor Statistics’ monthly jobs report, investors are waiting with bated breath.
All eyes will be on the state of the labor market, which is one of the most important factors in the Federal Reserve’s fight against inflation.
According to Refinitiv estimates, the US economy will have added 250,000 jobs in September. This would be the lowest monthly job gain since December 2020.
Investors will be happy if the numbers are as good as they seem. Inflation and wages will fall as a result of a weakening labor force. This means that the Fed’s policy is effective and might stop pursuing aggressive interest rate increases.
My colleague Alicia Wallace reports that August’s jobs data indicated that the historically tight labor market has loosened by a notch. America added 315,000 jobs in August, which is a lower figure than the 512,000 monthly average gain over the previous 12 months.
However, the headline jobs number, which is highly anticipated, is now falling. But, BLS data shows that it’s still strong. Before the pandemic, the monthly average was approximately 200,000.
Corner of Pennsylvania Avenue and Wall Street
Just over a month is left before the midterm elections, and Wall Street hopes for gridlock.
According to Paul R. La Monica, an investor prefers it when politicians argue and little gets done.
Big returns in NYC are possible because of DC’s power splits. Edelman Financial Engines data shows that the S&P 500’s annualized return has been 16.9% over the nine years between 1948 and 2008, when a Democrat was elected to the White House and Republicans held a majority in both houses of Congress.
“Should Republicans win the House, equities will likely react positively based upon the proposition that Washington gridlock is good for business because of the absence of major tax or policy changes,” Daniel Berkowitz (senior investment officer at Prudent Management Associates) stated in a report.
Investors shouldn’t be too concerned about the outcome of the election. Stocks tend to increase over the long term, regardless of political outcome. The average annual return of the stock market since 1948, when there was full Democratic control, is still a solid 15.1%. When Republicans were in power, stocks posted an average gain of 15.9%.
Bottom line: Markets should care less about election results than they should about the elections themselves. In a report, Dan Clifton from Strategas Asset Management, the head of Washington research, stated that the S&P 500 had declined by 19% on average in midterm elections years before votes were cast. However, the market tends to bottom in October.