Energy stocks climb on reports of OPEC+ production cuts. Here's how we're responding

Published Mon, Oct 3 20223:23 PM EDTUpdated Mon, Oct 3 20224:29 PM EDT

Kevin Stankiewicz @in/kevinstankiewicz @kevin_stank

The Club's oil stocks surged Monday on the back of rising crude oil prices, fueled by reports that OPEC and its oil-producing allies are considering cutting production by more than 1 million barrels a day in November. The rally prompted the Club to trim some of our energy exposure and reinvest. The move by the Organization of Petroleum Exporting Countries and a group of partner producers led by Russia (collectively known as OPEC+) would be the cartel's most significant output reduction since the start of the Covid pandemic. OPEC+ is set to meet Wednesday in Vienna and announce a decision. West Texas Intermediate crude — the U.S. oil benchmark — was up nearly 5% Monday, at over $83 a barrel. Club energy holdings followed suit. Coterra Energy (CTRA) rose around 4%, to roughly $27 a share. Devon Energy (DVN) surged more than 8%, to roughly $65 apiece. Halliburton (HAL) advanced nearly 7% and was trading north of $26 per share. Pioneer Natural Resources (PXD) climbed more than 6%, to around $230 per share. As a result, we decided to sell 25 shares of Pioneer Natural Resources (PXD) on Monday and use some of that cash to build out our new position in Estee Lauder Companies (EL). In general, we continue to view our energy holdings as a hedge against inflation and believe the large dividend payouts of Pioneer, Devon, and Coterra, in particular, bolster the investment case. OPEC in the 'driver's seat'? The rally comes amid the backdrop of a volatile and unpredictable oil market since the start of the year. Prices had climbed over $100 a barrel, bolstered by geopolitical risk and sanctions on Russia's oil industry following its invasion of Ukraine in February. But oil then plummeted in the third quarter, as the global economy showed signs of slowing, with WTI falling by more than 17%. At its September meeting, OPEC+ announced a small production cut of roughly 100,000 barrels a day for October. However, that's a tiny fraction of global oil demand and failed to stem the slide in crude prices, as the cartel hoped. One million barrels a day is equal to roughly 1% of global supply. The drop in oil prices has been good for U.S. consumers and eased the inflationary burden, but OPEC and its allies want to see prices stabilize higher. Lowering output is a way for the producers to respond to reduced demand and bring prices back up. Indeed, analysts told CNBC oil could return to $100 per barrel if OPEC+ follows through with the cuts — though the Club is skeptical oil could rise that high if demand continues to fall in an economic slowdown. OPEC — a 13 member cartel that's de-facto led by Saudi Arabia — joined forces with Russia and other producers in 2016 to stabilize an oversupplied market, giving the cartel renewed clout. OPEC's influence over global oil markets had been waning for years beginning in the 2010s, a result of the hydraulic fracturing boom in the U.S. — known as shale fracking — which helped American energy production grow dramatically after the Great Recession. The U.S. is curr