Oil & Gas: Feeling its Cartel Oats Again, Comparative Upstream Performance

Excerpt from Footnotes and Flashbacks: Week Ended April 9, 2023

The latest OPEC+ cuts to start last week surprised the market, but after an initial upward pop settled down to end the week. OPEC was making a point that did not register as meaningfully as the last one did in the political realm. The Russian-Ukraine war did not have the scale of damaging effects that had been expected and CPI has been moderating, so US markets are more focused on bank deposits than oil deposits right now. 

After popping by over 6% to an $80 per bbl handle, the price range hung in around that level to close out the week. WTI is up almost 20% from the low tick in March, so the change is not a small one in the context of earlier stretches in the year as oil equities sagged.

With the CPI release this coming week, the discussion could turn to how the OPEC action might reverberate along the refined product stream ahead of peak driving season. There will be some consideration of how it might play along the petrochemical chain in raw materials, but low natural gas is more important on that front in the US. 

There will be more chatter around what oil could in theory do from here, but many will take the view that global cycles (with China at the top) will be the main event. Demand questions will still be something that cannot be resolved until the economic stories play out. The capex updates from the E&P players with earnings season will get a lot of attention with natural gas having crashed and oil spending in flux after a period of oil prices well below expectations in 2023.

Above we update the running stock performances of numerous bellwether names cutting across shale leaders, major Permian players, some leading oil sands companies, and some of the diversified global majors. We line them up from highest to lowest returns over the trailing 3-month period.

We entered the weekend with Pioneer as one of the top Permian players potentially being targeted for acquisition by Exxon. That would send more M&A and consolidation scenarios back into action. E&P is highly fragmented relative to many major industries, but more power in the hands of the larger players would get tongues wagging in Washington. Diverting cash flow to M&A costs rather than development and increased production could ironically show up as a theme.

Commentators tend to get colorful after an OPEC move. We were reading some of the trade literature, and one complaint in the chatter was that OPEC members can trade on inside information while also being in a cartel.  Essentially, the major members can play in leveraged commodities market trades ahead of any action (you would think it was the US in the 1980s). They control the news flow and the information and can trade ahead of any decision to cut or increase production. Sweet deal.

In the end, that OPEC cut may simply be a forecast of cyclical expectations.