Big oil makes a comeback

COMEBACK: Brent oil is near a six-month high $90/bbl. and the market is slipping into a deficit. Oil equities (NYSE:XLE) have started leading all sectors up. OPEC+ is maintaining its big supply cuts even as demand picks up. And geopolitical tensions and investor ‘inflation hedge’ demand add to the mix. It’s a recipe for a grind higher in prices and in inflation concerns, for now. But uniquely among commodities, oil prices may ultimately self-adjust. As OPEC+ unity frays and supply cuts relax. Whilst oil stocks may need a broader turnup in their profits outlook. Macro worries are lessened by falling energy intensity and low inflation-adjusted prices (chart).

OPEC: Yesterday’s oil cartel monitoring meet saw no change to its tough supply curbs. OPEC+ is holding back 3.66mbpd. from the market. With Russia and Saudi making an extra 2.2mbpd of voluntary cuts through June. This is equal to 5.5% of est. 2024 oil supply of 103mbpd. And offsetting surging non-OPEC supply, led by the US that is now by-far the world’s largest producer. This is driving the market into a fundamental deficit. As demand is being revised up with US growth exceptionalism and China’s incremental stimulus. A geopolitical risk premium is also rebuilding with latest surge in Mid-East tensions and Ukraine attacks on Russian refineries.

BIG OIL: Higher Brent, an M&A rebound, and shareholder friendly cash-return policies, made energy the top performing US sector in March and the 2nd best this year. Marathon Petroleum (NYSE:MPC) is among the top ten US stock gainers this year. Exxon (NYSE:XOM) up 2x the S&P 500. This has narrowed the sector 13x forward P/E valuation discount to the tech-laden S&P 500 to 40%. And widened the US valuation premium to Europe’s energy majors to 60%. Further sector gains will likely need to see a turnaround in the weakening earnings outlook. As 25-year low natgas prices and a depressed refining crack spread have offset the oil price recovery until recently.