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 will likely cause gas prices to rise, which won’t please consumers.
However, there is one winner from the whole ordeal: Oil stocks.
What’s the deal? The cartel of major oil producers, including Russia and Saudi Arabia, announced Wednesday their largest production cuts since the outbreak of the pandemic. Although the reduction, which is equivalent to around 2% of global oil demand will not begin until November, prices saw an immediate increase.
After the announcement, oil prices reached three-week highs. Brent crude oil, the international benchmark for oil prices, was just below $95 per barrel on Friday morning, an increase of about 6% from Monday.
As a result, US oil and gas stocks have prospered. The S&P 500 energy sector, which includes stocks such as Exxon Mobil, has seen a surge in trading.
(XOM), Chevron
(CVX) & Phillips 66
(PSX) — The index is up almost 15% for the week, while it is up 3.7% overall.
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 cut will result in higher dividends and stock purchases among energy companies.
Energy companies have had an extraordinary year so far.
Exxon Mobil has seen a more than 60% increase in sales year to date, Halliburton
(HAL) has risen nearly 25%, and Occidental Petroleum has risen nearly 25%
(OXY), boosted Warren Buffett’s Berkshire Hathaway
(BRKA) has increased its stake in the company by 127%. For the same period, the S&P 500 was down 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 2022, an increase of 273% over the previous year. Chevron’s second quarter profit also rose by 277% compared to the previous year.
These profits have been used largely by energy companies to reward shareholders and attract them. This makes their stock even more attractive. Major oil and gas companies are expected to repurchase shares at near-record levels this year. Bernstein Research estimates that the seven largest companies in the world, including Exxon Mobil and Chevron, will repurchase close to a record number of shares this year.
(BP) and Shell
(SHLX) are expected to 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 chief global strategist at LPL Financial. He stated that companies are now more focused on shareholders than ever before. “The sector is being rewarded as a result. 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. This OPEC announcement could make the year 2022 the year for big energy.
As they wait for the Bureau of Labor Statistics’ monthly jobs report, investors are holding their breath.
All eyes will be on the labor market, which is one of the most important factors that will help determine the Federal Reserve’s next steps in fighting decades-high 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. A weakening labor force will cause inflation and wages to fall. 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 markets have loosened by a notch. The jobs report for August showed that America added 315,000 jobs, which is a lower level than the 512,000 average monthly gain in the past 12 months.
However, the headline jobs number, which is highly anticipated, is now falling. However, it’s still strong, according to BLS data. Prior to the pandemic, the monthly average was around 200,000.
The midterm elections are just over a month away 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 has seen an annualized return 16.9% over the nine years since 1948, when a Democrat was elected to the White House and Republicans held a majority in both the House and the Senate.
“Should Republicans win the House at a minimal, 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 rise 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 solid 15.1%. Stocks experienced an average gain of 15.9% when Republicans were in power.
The bottom line is that markets should care less about election results than they should about the elections themselves. In a report, Dan Clifton, head Washington research at Strategas Asset Management noted that the S&P 500 had declined by 19% on average in the midterm election years before votes were cast. However, the market tends to bottom by October.
The Bureau of Labor Statistics publishes its September jobs report at 8:30 AM. ET.
Next week: The third quarter earnings season starts. Expect reports from large banks like JPMorgan Chase
(JPM), Wells Fargo
(WFC), Citigroup
(C), Morgan Stanley
(MS), PNC
(PNC), US Bancorp, and consumer staples such as Pepsi
(PEP), Walgreen
Domino’s and (WBA)s
PPI and CPI, which are closely monitored measures of inflation in the US, will also be released.
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