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Oil Stocks Jump on Monday: Here's Why

Motley Fool - Mon Oct 3, 2022

What happened

Oil stocks had a great day on Monday with some climbing over 10%. The big news came from OPEC+, which is reportedly considering cutting back oil supply by over 1 million barrels per day in what's being called a "historic cut." Nothing is confirmed yet, but that hasn't stopped investors from betting on potential winners.

Transocean(NYSE: RIG) jumped as much as 8.9%, Kosmos Energy(NYSE: KOS) rose 11.6%, and Tellurian(NYSEMKT: TELL) traded 10.8% higher. The stocks were up 8.1%, 8.1%, and 9.2% respectively at 3 p.m. ET.

So what

OPEC+, which is the oil organization that sets production for partner countries and can drive prices higher or lower, is set to meet in Vienna, Austria, on Wednesday and it's being reported that a big cut in production is coming. Industry and media reports vary in production cut predictions, but they range from a 500,000-barrel-per-day cut to over 1 million barrels.

The short-term impact is likely higher prices. Today, the price of West Texas Intermediate crude oil is up 5% to $83.47 per barrel and Brent crude is up 4.4% to $88.89 per barrel. Depending on the size of the cut, $100 per barrel is possible.

Ironically, cutting oil production would be great for non-OPEC+ producers. That's why the companies above are benefiting. U.S. producers could decide to drill more if higher oil prices are sustained and that will lead to demand for companies that provide services, like Transocean and Kosmos Energy.

The surprising mover here is Tellurian, which is a natural gas exportation play, but investors may see upside from higher energy prices broadly, even if OPEC+ doesn't impact natural gas directly.

Now what

The oil business has been extremely lucrative over the last year as high prices have led to strong cash flows for oil producers. But many companies haven't had confidence to expand exploration to profit from high prices because they're afraid oil will fall in the future, partly because the market was in backwardation (meaning future oil prices were lower than current oil prices).

An aggressive OPEC+ could mean that oil prices will remain elevated for the foreseeable future. That will likely lead to more domestic drilling and production as prices remain elevated. Revenue and earnings for oil and gas companies could be strong as well.

OPEC+ has gone back and forth over the years from oversupplying the market trying to squeeze U.S. oil producers, to undersupplying to raise prices. It seems like the trend is moving to less supply, but that's good for oil stocks. As long as it doesn't send the world into a recession, this could be very bullish for oil and gas stocks over the next few years.

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Travis Hoium has no position in any of the stocks mentioned. The Motley Fool recommends Transocean. The Motley Fool has a disclosure policy.

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