Oil News: OPEC cuts production in an attempt to push up oil prices

OPEC members, along with several non-member allies, agreed this week to cut their oil supplies by an additional 500,000 barrels per day (BPD) from January. This reduction comes on top of a production cut of 1.2 million barrels per day that the group agreed to in October 2018.

This is a positive development for the oil market, as it will help keep supply at or below demand, which has grown at a slower pace due to the trade war between the states. United and China. The reduction in production should help burn off some of the excess oil that has accumulated in storage due to the rapid growth in production in the United States. % this week.

Image source: Getty Images.

What this news means for the oil market

Crude prices in the United States rebounded this week in anticipation that OPEC could cut production further. WTI, the US oil benchmark, has now exceeded $ 59 a barrel, its highest level since peaking in September following a drone attack on a Saudi oil facility.

Oil may still have a ways to go now that OPEC has formalized its plans. The reduction in supply is expected to lead to lower global oil storage levels, which generally pushes up prices. Of course, this assumes that demand continues to grow as expected and that supplies outside the OPEC consortium do not grow faster than expected.

There is reason to be optimistic in both cases. The United States and China are said to be close to resolving their trade dispute, which would be a positive development for the global economy and oil demand. Meanwhile, most oil companies in the United States are planning to cut spending on drilling new wells next year due to the volatility of the oil market. Due to these factors, oil prices could reach as high as $ 60 in the coming months, which would be great news for oil producers.

An oil pump in a grassy field at sunset.

Image source: Getty Images.

Take advantage of OPEC news

If oil prices pick up in the 1960s, it will benefit the entire industry as the oil companies would generate more cash flow. Among the biggest beneficiaries would be those with the lowest costs since they would generate more money.

United States-focused oil producer Devon Energy (NYSE: DVN), for example, only needs an average of $ 48 worth of oil next year to support its spending plans. At that price, he can pay his dividend and fund his capital spending plan, drilling enough new wells to increase his oil production by 7-9%. As a result, it will generate an increasing supply of excess liquidity if oil is above that level. If crude averages around $ 60, Devon Energy could produce $ 675 million in excess cash. To put that in perspective, if he used that money to buy back shares, he could withdraw 8.8% of his outstanding shares at the current price.

Diamondback Energy (NASDAQ: FANG), likewise, can produce a burst of free cash flow next year if the oil is in the $ 60 range. The company’s current business plan would allow it to generate enough cash at $ 45 a barrel to pay its dividend and finance the new wells needed to increase its oil production by 10-15% year-on-year. . Meanwhile, at $ 55 a barrel, it can produce $ 675 million in cash available before dividend next year. That’s enough money to withdraw 5% of its outstanding shares at the current share price through its buyback program.

Several other drillers are also set up to generate a lot of free cash if crude prices exceed $ 50 a barrel next year. The two Marathon Oil (NYSE: MRO) and ConocoPhillips (NYSE: COP) use this level of oil prices for their 2020 budgets. Both can pay their current dividends and fund their capital programs at this price. Thus, they are on the way to generating significant liquidity if the oil is in the $ 60 that they will return to shareholders through their share buyback programs. ConocoPhillips has already announced that it will spend $ 3 billion on buybacks next year, using its cash balance if necessary. Meanwhile, Marathon recently beefed up its buyback authorization so that it now has $ 1.45 billion.

Putting the oil market at ease

Crude prices have rebounded all around this year due to conflicting views on supply and demand. OPEC, however, aims to reduce supply problems by further reducing its production. This should help support the price of crude oil in the coming months, which would be a boon to US low-priced oil producers. This could help raise their stock price, especially since most plan to use the money to buy back large chunks of their outstanding stock.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

Steve R. Hansen

Leave a Reply

Your email address will not be published.