A decision Monday by Saudi Arabia and Russia, the world’s largest oil exporters, to cut production in an effort to push up oil prices is a bullish development for the Club’s struggling energy holdings. Saudi Arabia, the de-facto head of the Organization of the Petroleum Exporting Countries, said it would extend a voluntary oil-output cut of 1 million barrels a day through August. The cartel’s key oil-producing ally, Russia — part of a larger group of producers known as OPEC+ — said it would reduce its oil exports by 500,000 barrels a day next month. Oil prices edged up Monday, with West Texas Intermediate crude — the U.S. oil benchmark — rising by 0.28%, to just under $71 a barrel. WTI has fallen nearly 15% from its 2023 high in April. The Club’s oil-services firm, Haliburton (HAL) — which is down nearly 14% year-to-date — soared 2.7% Monday morning, to nearly $34 a share. Exploration-and-production names Pioneer Natural Resources (PXD) and Coterra Energy (CTRA) edged up slightly. Monday’s decision stands to benefit our three oil stocks mainly because higher energy prices should translate into greater free-cash-flow generation for these companies — a portion of which gets returned to shareholders like us through stock buybacks of dividends. Still, the move by the Saudis and Russians comes amid worries over a slowing global economy and ahead of another potential round of interest-rate hikes from the U.S. Federal Reserve to combat still-persistent inflation. And, at the same time, global oil demand has been held back by China’ slower-than-expected post-Covid economic recovery. In this uncertain economic environment, the U.S. has repeatedly made clear its desire to keep oil prices lower. That could incentivize additional drilling at home, given more domestic production could offset efforts by OPEC+ to push prices up through supply cuts. Nonetheless, while output cuts may be supportive of oil momentarily, we’re skeptical that they alone can do much to materially increase crude prices. Rather, we suspect that a rebound in U.S. economic growth and an acceleration in the Chinese recovery will be key for the increased demand needed to take energy prices a leg higher. A more positive outlook for economic activity would not only benefit oil prices but could also lead to a rotation away from the sectors that have led equities markets to the upside all year — namely, technology, communication services and consumer discretionary. In that case, investment dollars would likely flow into energy, financials and industrials. But if energy prices were to remain relatively suppressed, we would expect the year-to-date winners to continue their march higher, benefiting from more affordable oil prices. Either way, a diversified portfolio will carry us through whatever the second half of the year has in store. (Jim Cramer’s Charitable Trust is long HAL, PXD, CTRA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club…
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