The cost of WTI and Brent crude oil decreased despite another reduction in production from the Organization of the Petroleum Exporting Countries (OPEC). This reduction was expected and helps maintain a tight balance in the oil market, making it seem like a typical buy-the-rumor-sell-the-news event. Overall, OPEC’s actions have caused confusion in a difficult-to-predict market, but it is highly likely that oil prices will increase once again in the near future.
OPEC’s latest policy involves cutting production by 2.2 million barrels per day starting in Q1 2024, including voluntary cuts by Saudi Arabia and Russia, resulting in a net increase of 0.9 mbpd. However, since compliance is voluntary, analysts are skeptical that this measure is adequate to support oil prices despite OPEC’s 40%+ market share.
Coincidentally, the 0.9 million barrel per day cut aligns with the EIA’s latest supply forecast. The EIA’s early November forecast predicts a global supply increase of approximately one mbpd in 2024, keeping supply slightly ahead of demand growth. Now, it appears that the market is more evenly balanced, leaving economic activity, inflation, and interest rates in control, unless the EIA’s forecast is incorrect. OPEC predicts demand to grow by more than two mbpd, which may happen given the anticipated interest rate cuts next year.
Inflation cools: FOMC expected to lower rates
The Federal Open Market Committee (FOMC) has not yet indicated the first interest rate cut or explicitly called a halt to the cycle, but the market is factoring it in. The October reading of the PCE Price Index confirms that inflation is cooling at the anticipated rate, raising hopes for a soft landing. According to the CME’s FedWatch Tool, there is a 0% likelihood of another rate hike, and the first significant chance for a cut is in March. The probability increases to nearly 80% for a cut in May and is likely to rise given the trajectory of inflation. In this scenario, interest rate cuts will help stimulate the housing market and overall economic activity, boosting oil demand.
The risk is that inflation may begin to cool more rapidly than expected, potentially leading to disinflation, deflation, and economic stagnation, if not an outright recession. In this situation, no FOMC rate cuts will offer support for oil prices.
Energy companies well positioned for higher forecasted prices
Despite the impact of OPEC’s latest cuts, the EIA predicts significant price increases over the next year. They anticipate that Brent and WTI will average about 10% higher than in 2023 and rise by approximately 15% from the recent low. This puts energy companies in a favorable position to achieve profitable growth compared 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, as opposed to the double-digit declines seen this year. It is likely that these estimates are conservative given the oil price forecast, so upward revisions are expected. However, economic uncertainty in inflation, interest rates, GDP growth in China, and ongoing conflict could impact the outlook.
After the OPEC announcement, the WTI price fell by nearly 3%, but it is currently well supported. This level, around $75, has been tested several times in the past month and seems to be a strong support level for the market. The indicators suggest the potential for another upward movement within the larger trading range, which may commence before the end of the year. In the event the market is unable to maintain support at $75, the next target would be around $69. Before considering Energy Select Sector SPDR Fund, it is important to be aware of this. Although Energy Select Sector SPDR Fund currently has a “hold” rating among analysts, top-rated analysts believe these five stocks are better investments. View The Five Stocks Here Looking to generate income with your stock portfolio? Utilize these ten stocks to generate a secure and reliable source of investment income. Get This Free Report
