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Key Takeaways
- OPEC controls 40% of the world’s oil production and accounts for 60% of internationally traded oil.
- This gives the organization massive control over the international price of oil, allowing it to keep prices high.
- Oil prices directly influence the value of oil stocks. When OPEC takes steps to increase oil prices, it can also boost the price of oil stocks.
The Organization of the Petroleum Exporting Countries (OPEC) announced last week that it would cut production of oil by approximately 2 million barrels of oil per day. That’s a reduction in the global supply of about 2%.
This announcement had an immediate effect on the oil and gas markets, driving prices higher. The price for a barrel of crude oil rose from $76.71 to $92.64, an increase of just under 21%. But, how do OPEC’s meeting and the resulting change in the price of oi, impact the stock market — and oil and gas stocks in particular? We’ll break down what you need to know.
What is OPEC?
The Organization of the Petroleum Exporting Countries (OPEC) is an international group that includes thirteen countries. Each country involved is a major exporter of oil, with the organization controlling as much as 40% of the world’s oil production and 80% of the world’s oil reserves.
Its membership includes:
- Algeria
- Angola
- Equatorial Guinea
- Gabon
- Iran
- Iraq
- Kuwait
- Libya
- Nigeria
- Republic of the Congo
- Saudi Arabia
- United Arab Emirates
- Venezuela
Ecuador, Indonesia, and Qatar are all former members. There is also OPEC+, a group that includes non-OPEC members, such as Mexico, Malaysia, Oman, and Russia, that collaborate with OPEC on specific goals through agreements on production increases and cuts.
The history of OPEC
OPEC began shortly after World War II when Venezuela and Iran invited Iraq, Kuwait, and Saudi Arabia to meet to discuss petroleum exports. At the time, the United States was both the world’s largest consumer and producer of oil. Of the seven largest oil companies in the world, five were headquartered in the US.
In 1959, these major oil companies informed oil-producing nations that they would pay 10% less for oil going forward. In response, the first Arab Petroleum Congress met. This meeting, which included a delegation from Venezuela, resulted in an agreement to form an Oil Consultation Commission.
1960 saw the official founding of OPEC in response to further cuts in the prices oil companies were willing to pay for crude oil. Over the next decade, OPEC expanded from five members to include many of its current members.
In 1973, some OPEC members nationalized their country’s oil production and increased prices. OPEC followed this with an embargo on sales to the U.S. and other nations supporting Israel in the Yom Kippur War.
Increased prices and the embargo led western countries to try to reduce their reliance on oil from the Middle East. Supply and prices have ebbed and flowed in the decades since.
Today, OPEC collaborates on things such as levels of oil production to try to influence international oil prices and to ensure that member nations receive top dollar for their exports.
How OPEC’s meeting affects oil prices
When OPEC meets, it discusses many topics, including the current economic climate, supply and demand for energy — including oil — and other factors that can influence the value of oil and the profitability of producing and exporting it.
The members of OPEC+ control roughly 40% of the world’s production of crude oil and account for 60% of the oil traded internationally. That gives the organization significant control over the commodity.
The members of OPEC want to maximize the profit they earn through producing and exporting oil. When OPEC meets, the members consider the market for oil and make decisions about how much oil to produce to maximize profit.
Prices for commodities like oil are determined by supply and demand. When supply increases or demand decreases, prices fall. Reductions in supply or increases in demand mean a rise in prices.
What if demand falls?
If demand for oil drops, OPEC will likely meet and agree to cut production. This allows supply to match demand and maintain a steady oil price. If demand rises, OPEC might decide to increase production, which can temper price increases but allows exporters to earn more money through greater sales volume.
Because OPEC has such significant control over the level of global oil production, its meetings play a massive role in determining the world’s supply of oil. In turn, that means OPEC can influence oil prices. Every production cut or increase announced by OPEC is generally followed by a corresponding rise or fall in price.
How OPEC influences oil and gas stocks
OPEC plays a huge role in determining the cost of oil. Oil and gas stocks are influenced by the cost of oil, so OPEC directly influences the value of these stocks.
The demand for energy is relatively constant. There may be seasonal fluctuations, but it simply is not possible for someone to flip a switch and turn their car from a gas car to an electric one. That means that people must keep buying oil and gas, regardless of prices.
If the price of oil and gas increases, that’s good news for the companies that profit from those commodities.
Consider Exxon Mobil, an American multinational oil and gas corporation. It produces hundreds of thousands of dollars’ worth of oil every single day. If the oil it produces becomes worth more, the company generates more profit than expected, which can boost its stock price.
One share of Exxon Mobil cost $83.98 in late September 2022. In the wake of OPEC’s announcement, it rose to more than $102 — an increase of more than 21%.
You can see similar effects on other oil stocks like Chevron (14% increase) and Phillips (25% increase).
On the other hand, if oil prices fall, the value of oil stocks is likely to decrease. If an OPEC meeting results in a decision to increase oil production, it can hurt oil and gas stocks by reducing the value of their products.
Of course, there are other factors that are outside of OPEC’s control that can also influence the price of oil and gas stocks. The COVID-19 pandemic, for example, led to a massive reduction in oil demand as the world entered lockdowns to control the disease.
This led oil prices and some oil stocks to plummet. For example, Shell fell from $60.21 at the beginning of 2020 to a low of $30.08 in March.
Mishaps, instability, and other issues that impact production may also lead an oil-producing nation to fall short of its production goals, constricting oil supply.
OPEC also does not hold total control over its members. Some members may choose to ignore OPEC’s production goals or quotas and produce different amounts of oil than OPEC requests.
Ultimately, while OPEC plays a large role in determining the price of oil (and therefore oil stocks), it is only one piece of a very large and complicated puzzle.
Bottom Line
OPEC is an international organization that controls as much as 40% of the world’s production of oil. The members of this group frequently meet to discuss production quotas and to manage the price of oil internationally.
The group’s influence over the price of crude oil also gives it influence over the value of oil and gas stocks. Generally, reducing oil production increases oil prices, which increases the value of these stocks. Boosting oil production slashes the price of oil, which can cause the price of these stocks to fall.
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Source: https://www.forbes.com/sites/qai/2022/10/16/how-the-opec-meeting-on-production-influences-oil-and-gas-stocks/