Energy Shares Drop as OPEC Keeps Plan to Increase Production

Energy shares took a hit on Monday as crude prices fell following the OPEC+ announcement that it will increase output as planned in April. The news comes as Wall Street increasingly worries about a slowdown in the global economy under the prospect of trade wars. eog resources fell after price-target trims following disappointing fourth-quarter earnings released last week.

The OPEC+ decision to increase production is expected to have both short-term and long-term impacts on global oil prices and market dynamics. In the short term, the increase in supply will likely lead to a decrease in prices, as more oil is added to the market. According to Reuters calculations, OPEC+ will add about 138,000 barrels per day to its production plans beginning in April. This increase in supply could lead to a decrease in prices in the short term, as energy company shares were among the biggest losers on Monday.

In the long term, the OPEC+ decision to increase production could have both positive and negative impacts on the energy sector. On one hand, the increase in production could lead to a more balanced oil market, with OPEC+ production increases supporting prices closer to $100/bbl. On the other hand, the decision could strain OPEC+ unity, as some members like Saudi Arabia and the UAE have differing views on the matter. If OPEC+ unity is compromised, it could lead to a retaliatory price war or reduced revenues for member countries, complicating their long-term economic plans.

The potential geopolitical implications of this decision are significant, particularly regarding US-Saudi relations and the ongoing conflict in Ukraine. President Trump has been pressuring Saudi Arabia and OPEC to increase oil production to lower prices and exert economic pressure on Russia. If Saudi Arabia decides to increase production in response to Trump's pressure, it could strain US-Saudi relations, as it may be seen as aligning with Washington at the risk of breaking OPEC+ unity. However, if Saudi Arabia resists US pressure and maintains its strategic alliance with Russia, it could also lead to political or economic consequences, such as the possible reintroduction of the NOPEC bill, which aims to penalize coordinated pricing of oil.

The ongoing conflict in Ukraine could also be impacted by the OPEC+ decision to increase production. If the US eases sanctions on Russian oil exports to China and India, it could clear space for Saudi barrels in the Asian market, potentially benefiting Saudi Arabia. However, if there are backdoor deals with Moscow tied to a Ukraine negotiation, it could potentially hurt Saudi Arabia's market access in Asia.

The production increase announced by OPEC+ is expected to have several implications for the energy sector's M&A activity and the outlook for US oil and gas production growth. The increase in production may lead to a slowdown in M&A activity within the energy sector, particularly in the US. This is because public companies, which have been actively consolidating to maximize cash returns to shareholders, may become more cautious about investing in growth-oriented acquisitions. Instead, they might focus on cost-cutting measures and returning excess cash to shareholders. This trend is evident in the US, where private entities have been more focused on growth, while public firms have been seeking to maximize cash returns (Source: Rystad, Feb. 12, 2024).

The production increase by OPEC+ is expected to flatten the US production growth curve. This is because public firms, which have been driving M&A activity, are primarily focused on maximizing cash returns rather than growth. In 2023, US oil production increased by about 850,000 barrels per day. However, estimates for 2024 growth are already falling rapidly, with projections ranging from 150,000 to 400,000 barrels per day (Source: Rystad, Feb. 12, 2024). This slower growth rate is expected to continue throughout 2024, as modest inventory builds support ongoing weakness in the oil market.

In conclusion, the OPEC+ decision to increase production as planned in April is expected to have both short-term and long-term impacts on global oil prices and market dynamics. The decision could lead to a decrease in prices in the short term, but it could also contribute to market stability and support prices closer to $100/bbl in the long term. However, geopolitical uncertainty and potential strain on OPEC+ unity could also impact market dynamics. The production increase is expected to slow down M&A activity within the energy sector, flatten the US production growth curve, and maintain a supply surplus in the oil market, keeping prices relatively low and discouraging growth-oriented investments.