OPEC+, the alliance that includes major oil players along with Saudi Arabia and Russia, has declared an intention to boost petroleum output by 500,000 barrels daily starting in November. This increase is set to last for three months, entering the market with low demand from economic slowdowns in the U.S. and Asia. Consequently, the additional 45 million barrels over this timeframe are expected to influence global oil prices. Although OPEC initially denied any similar production surge, September witnessed a similar escalation in supply. Analysts have started forecasting potential declines in Brent crude prices. This projection raises significant concerns for stakeholders within the industry.
The proposed increase in oil production stands in contrast with past strategic approaches where OPEC+ had occasionally aimed to stabilize prices through controlled supply mechanisms. Past efforts often witnessed production cuts to support price increases. Such strategies highlighted the cartel’s influence in managing price stabilizations instead of taking actions that might induce market oversupply, a scenario discussed in this context.
How Will Occidental Petroleum (OXY) Stand?
Occidental Petroleum is prominently susceptible to this potential downturn due to its investment in upstream exploration and production activities. Warren Buffett backs Occidental, which derives around 80% of its earnings from U.S.-based shale operations, specifically in the Permian Basin.
“With breakeven costs at $50 to $55 per barrel, a $5 price shift could impact free cash flow by 15% to 20%,”
the company notes. This high reliance on upstream earnings, alongside significant net debts, means any substantial fall in oil prices could stretch their financial stability. With recent production figures recorded at an average of West Texas Intermediate (WTI) crude at $63.74 per barrel, challenges still remain in reducing volatility risks.
What Does This Mean for ConocoPhillips (COP)?
ConocoPhillips, a significant player in the oil sector, is similarly vulnerable given its substantial interest in the upstream sector. Focusing on shale basins like the Permian, Eagle Ford, and Bakken, over two-thirds of its revenue springs from oil production. Weighing in at around $24 billion, their manageable debt is overshadowed by operational risks. A price floor at $30 to $35 provides some margin security, yet sustained downward trends could hurt margins. Exiting the second quarter on reasonable earnings, the executives highlight existing concerns regarding market demand.
Similarly, Devon Energy navigates the landscape of oil production with caution. Leaning heavily on its multi-basin operations for income, it operates with breakeven costs hovering over past projections of $43 to $45 per barrel. A looming price reduction of $5 per barrel would likely cause a 12% to 18% impact on free cash flow. Their dive into this scenario emphasizes the risks attached to their tied variable dividend.
Market observers often focus on how production levels set by bodies like OPEC+ interplay with historical data. Periodic supply reductions or boosts can play decisive roles in how stocks react across the market. This ongoing narrative understates past instances where OPEC+ has provided direction to oil prices and, by extension, stock prices for petroleum-based companies.
In the impending months, anticipating the full extent of this production increment remains challenging. Balancing revenue potential against market realities gives rise to broader supply chain and financial considerations for firms such as Occidental, ConocoPhillips, and Devon. The constrained price flexibility these entities face reinforces the need for strategic adaptations to weather any forthcoming pricing fluctuations.
