Oil prices surged on Tuesday, driven by heightened market speculation that OPEC+ will prolong its existing production cuts. The alliance, which manages roughly half of the world’s oil supply, is deliberating on extending these cuts through the first quarter of 2025, aiming to stabilize a market characterized by weak demand and geopolitical uncertainties.
Despite the bullish sentiment surrounding a possible extension of OPEC+ cuts, the energy market remains volatile. The interplay between demand recovery, geopolitical tensions, and non-OPEC+ supply growth suggests that uncertainties will persist. While oil prices might find short-term support, structural challenges could cap long-term gains.
Investors interested in the sector could benefit from focusing on resilient stocks like ExxonMobil XOM, Devon Energy DVN and APA Corporation APA.
What Drove Oil Prices?
Yesterday’s spike saw WTI crude rise 1.9% to $69.38 per barrel, while Brent crude climbed 1.8% to $73.14 per barrel. This increase comes amid a backdrop of global economic ambiguity, a strong U.S. dollar pressuring commodity prices, and the lingering risk of oversupply. The dollar’s strength, particularly against currencies of emerging markets such as China and India, continues to weigh on oil demand.
Geopolitical factors are also exerting pressure. Re-escalating Middle Eastern tensions, as evidenced by recent violence involving Hezbollah and Israel, add to the uncertainty. Additionally, fresh U.S. sanctions targeting Iranian crude exports could tighten global supply, especially if President-elect Donald Trump adopts a more aggressive stance on Iran and Venezuela in 2025. These sanctions have already curtailed shipments, potentially removing up to 1.2 million barrels per day from global markets.
OPEC+’s Complex Dilemma
OPEC+, spearheaded by Saudi Arabia and Russia, has been grappling with challenges posed by weaker global demand and rising non-OPEC+ production, especially from the U.S. The group’s current output cuts of 5.86 million barrels per day represent about 5.7% of global demand. Analysts widely expect these cuts to be extended, with a planned January increase of 180,000 barrels per day likely postponed.
While Saudi Arabia advocates a cautious approach, smaller producers within OPEC+ are growing restless. Countries like the UAE, eager to boost production after investing in capacity, could complicate consensus. Compliance issues also loom large, as some members continue to overproduce despite collective agreements.
Demand-Supply Dynamics and China’s Role
China, once a cornerstone of global oil demand growth, is showing signs of stagnation. With transport fuel demand falling and electric vehicle adoption accelerating, analysts believe that Chinese crude imports may have peaked. Although jet fuel demand might recover, it is unlikely to offset declines in other sectors. The weakening Chinese economy adds to OPEC+’s woes, potentially capping price gains despite supply constraints.
Non-OPEC+ producers like Brazil and Guyana are seizing the opportunity to expand market share. U.S. output, buoyed by technological advances and policy support, continues to rise, threatening to undermine OPEC+’s efforts to prop up prices.
Investment Implications
For investors, this environment underscores the importance of focusing on fundamentally strong, resilient energy companies. Industry giants like ExxonMobil, Devon Energy, and APA Corporation, with their diversified portfolios and robust cash flows, are well-positioned to navigate this turbulent landscape.
Each of these stocks currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
ExxonMobil: It is one of the largest publicly traded oil and gas companies in the world with operations that span almost every corner of the globe. Spring, TX-based ExxonMobil is fully integrated, meaning it participates in every aspect related to energy — from oil production, to refining and marketing.
Devon Energy: Devon is an independent energy company whose oil and gas operations are mainly concentrated in the onshore areas of North America, primarily in the United States. The company’s assets are spread across the key oil assets of Delaware Basin, Eagle Ford, Anadarko Basin and Powder River Basin.
APA Corporation: Founded in 1954, Houston, TX-based APA Corporation is one of the world's leading independent energy companies engaged in the exploration, development and production of natural gas, crude oil and natural gas liquids. APA’s Suriname portfolio in South America is particularly exciting, where it continues to achieve significant drilling success.
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