Will Stocks Slip on Higher Oil Prices?

Are oil prices headed back to triple digits? Some say so after two major producers, Saudi Arabia and Russia, extended supply cuts last week. Rising crude and diesel prices feed into myriad popular fears today. But in our view, overlooked drivers imply prices will be range-bound—so the presumption the recent rise in crude means much higher levels ahead is likely a mistake.

Oil prices have climbed throughout the summer, from $74.51 per barrel at June’s end to $90.44 a barrel on September 8, an increase of more than 21%.^[i] That has led to higher fuel costs, including for gasoline and diesel—and the latter has been getting eyeballs recently, with the national average rising from $2.48 a gallon at June’s end to $3.25 as of September 8.^[ii] Now, with Saudi Arabia and Russia extending their voluntary production cuts of a combined 1.3 million barrels per day (bpd) from June levels to the end of the year, worries have grown. Many wonder: Will black gold’s rise hurt consumption? Does more costly crude spell trouble for already flagging demand and economic activity in China? Will it reignite inflation? Is this a sign to buy Energy stocks, since their earnings are price-sensitive?

But a review of recent history suggests the moves of Saudi Arabia, Russia and its partners in OPEC+ aren’t the gamechangers they used to be for oil markets. Last October, OPEC+ announced voluntary cuts to reduce production targets by 2 million bpd (from August 2022 levels)—to about 41.9 million bpd—starting in November and lasting through 2023.^[iii] The cartel followed that with another “voluntary production adjustment” in April this year amounting to 1.66 million bpd.^[iv] Despite all the speculation, we doubted OPEC+’s decisions would send oil prices soaring. OPEC+ members have struggled to meet their production quotas for myriad reasons, including disruptions (e.g., worker strikes in Nigeria) and underinvestment. Given most of the cartel’s members are already undershooting their production quotas, Saudi Arabia and Russia have seemingly taken it upon themselves to support oil prices with additional voluntary summertime production cuts.^[v]

These announcements seemed to spur some short-term volatility at times—as is often the case with OPEC+ news—but taking the longer view, the cartel’s lowering targets and production cuts haven’t sent prices back to early-2022 levels. Rather, Brent crude prices have remained range-bound. (Exhibit 1)

Exhibit 1: Oil Prices Amid Select OPEC+ Announcements

Source: FactSet, as of 9/11/2023. Crude Oil Brent Global Spot price, 6/30/2022 – 9/8/2023.

OPEC+ cuts may receive a lot of attention on the supply front, but the effect is limited since non-OPEC+ producers can offset those reductions to a great extent. The world’s largest single-nation producer, America, is set to hit an output record of 12.8 million bpd this year.^[vi] Canadian production has ramped up over the past couple years, and analysts estimate Canada will add almost 8% to its total output over the next two years.^[vii] Brazil’s oil and gas production hit a record high in July, and its main oil producer has increased investment in exploration and production.[viii] This isn’t a one-for-one exchange, but roughly speaking, non-OPEC+ producers—who adhere to market forces rather than a cartel’s mandates—can step in and supply oil if prices make it worth their while.

Meanwhile, despite fears of weakness from China, oil demand is showing few signs of abating—the IEA reported world demand hit a record in June and is set to register its highest annual level this year.^[ix] Persistent demand amid resilient supply argue against prices zooming far higher or vastly lower from here (volatility notwithstanding). Note, too, the summertime uptick isn’t so worrisome when compared to even just last year—prices are far off last March’s high. (Exhibit 2)

Exhibit 2: A Longer Look at Oil Prices

Source: FactSet, as of 9/11/2023. Crude Oil Brent Global Spot price, 12/31/2007 – 9/8/2023.

Higher oil prices can feed into any concern you want, but they don’t signal trouble for stocks or the economy more broadly. As the aforementioned Exhibit 2 shows, oil prices were in the triple digits for much of the early 2010s—a stretch when US GDP was expanding and the global bull market was just a few years into its decade-long run. Now, oil supply shocks can stir uncertainty—but that looks unlikely at this point, in our view. Even an upward drift in prices, which isn’t a given, isn’t a deterrent for this young bull market.