The cost of WTI and Brent crude decreased even with another decrease in production from the Organization of the Petroleum Exporting Countries (OPEC). This decrease was expected and aided in maintaining a tight balance in the oil market. It appears to be a “buy-the-rumor-sell-the-news” event. Ultimately, despite causing confusion, OPEC’s actions lead to the belief that oil prices will increase again soon.
OPEC’s most recent policy aims to reduce production by 2.2 million barrels per day commencing in Q1 2024, including the voluntary cuts by Saudi Arabia and Russia, resulting in a net increase of 0.9 mbpd. However, analysts are uncertain whether this move is adequate to support oil prices due to the voluntary nature of compliance, despite OPEC’s 40%+ market share.
Coincidentally, the 0.9 million barrel per day reduction aligns with the EIA’s latest supply forecast. The EIA’s early November projection suggests that global supply will increase by about one mbpd in 2024 to slightly exceed demand growth. This balance leaves economic activity, inflation, and interest rates in control unless the EIA’s forecast is incorrect. OPEC predicts demand to grow by over two mbpd, a possibility given the outlook for interest rate cuts next year.
The Federal Open Market Committee (FOMC) has not yet indicated the first interest rate cut or signaled the end of the cycle, but the market is pricing it in. The October reading of the PCE Price Index confirms that inflation is cooling as expected, raising hopes for a soft landing. According to the CME’s FedWatch Tool, there is a 0% chance of another rate hike, and the first substantial chance for a cut is in March. The likelihood of a cut rises to almost 80% in May and is expected to increase given the trajectory of inflation. In this scenario, interest rate cuts will aid in stimulating housing market and general economic activity, thereby boosting oil demand.
The concern is that inflation could cool faster than expected, potentially leading to disinflation, deflation, or economic stagnation, if not a recession. In such a situation, no FOMC rate cuts could help support oil prices.
Irrespective of the impact of OPEC’s latest cuts, the EIA predicts substantial price rises over the next year. They estimate that Brent and WTI will average about 10% higher than in 2023 and rise roughly 15% from the recent low. This positions energy companies well for profitable growth relative to 2023.
The consensus estimate for Energy Select Sector SPDR Fund NYSE: XLE revenue and earnings growth reported by Factset is 2% and 4% respectively, compared to the double-digit declines seen this year. It is expected that these estimates are conservative given the oil price forecast, therefore upward revisions are anticipated. However, economic uncertainty related to inflation, interest rates, GDP growth in China, and ongoing wars could impact the outlook.
Following the OPEC announcement, the price of WTI dropped nearly 3%, but it is currently well-supported. This level, near $75, has been tested multiple times in the last month and appears to be a market bottom. The indicators suggest that another bullish swing is likely within the wider trading range, possibly beginning before the end of the year. If the market cannot sustain support at $75, the next target is around $69. Before you consider Energy Select Sector SPDR Fund, you’ll want to hear this.While Energy Select Sector SPDR Fund currently has a “hold” rating among analysts, top-rated analysts believe these five stocks are better buys.View The Five Stocks Here Need to stretch out your 401K or Roth IRA plan? Use these time-tested investing strategies to grow the monthly retirement income that your stock portfolio generates.Get This Free Report
