OPEC’s surprise decision earlier this month to decrease production by 1.2 million barrels a day was seen as a bullish sign for the oil market. But one analyst says it’s a “red flag” for oil stocks, because OPEC is reacting to weak demand that may take a while to rebound.
JP Morgan analyst Christyan Malek wrote in a note on Friday that oil stocks have tended to post tepid returns at best after OPEC production cuts—even though those cuts are meant to boost oil prices. “On balance, we note that energy equities generally struggle to outperform the broader market and at best trades broadly flat in the context of OPEC cuts aimed at managing supply in the face of deteriorating economic fundamentals,” Malek wrote.
One problem, according to Malek, is that OPEC cuts tend to come during periods when the overall stock market is weak. In those periods, oil stocks often trade along with the broader market, as opposed to following the path of oil prices. If historical trends repeat this time, he wrote that “energy equities will remain negatively decoupled to oil prices (ie. stock performance muted/down even as oil trends higher).”
Energy was the market’s best-performing sector in 2021 and 2022. But this year it has been third from the bottom, and is lagging behind the broader market by 8% over the past six months. The
Energy Select Sector SPDR Fund
(ticker: XLE) is up 3.2% so far this year, and the
SPDR S&P Oil & Gas Exploration & Production ETF
(XOP) is up 4.8%. Big energy stocks are still trading at below-market multiples, though some have improved from single-digit valuations during the pandemic.
Exxon Mobil
(XOM) trades at 11.4 times its 2023 earnings estimates, for instance.
Malek thinks energy stocks could struggle for the next few months, though he has a bullish longer term thesis on the sector. In general, he thinks energy companies are investing too little in new production, and thus supply is likely to grow slowly over the next few years. Meanwhile, oil demand is still on the rise—despite global efforts to move away from fossil fuels.
Malek thinks that investors looking to benefit in the longer term should consider buying oil stocks on weakness, suggesting
Saudi Arabian Oil
(TADAWUL. 2222),
Shell
(SHEL),
TotalEnergies
(TTE),
ConocoPhillips
(COP),
Occidental Petroleum
(OXY),
Canadian Natural Resources
(CNQ), and
MEG Energy
(MEGEF).
But Malek thinks refiners—which are even more dependent on growing demand than producers—will underperform. Among the companies he’s cautious on are
PBF Energy
(PBF),
CVR Energy
(CVI), and
Valero Energy
(VLO).
Write to Avi Salzman at avi.salzman@barrons.com
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