IXC: OPEC+ Is Probably Not That Firm On Cut Phase-Out Telegraph

seekingalpha06-06

Jeremy Poland The iShares Global Energy ETF (NYSEARCA:IXC) is seeing some action today as markets digest the latest OPEC+ news, which comes after a long while of OPEC taking it easy with production as...

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The situation is that OPEC+ has delineated their aspirations for reigniting crude production and bringing new barrels to the market. Some of the delineations were less than expected, which is the reason for some downward pressure on oil markets today. However, it is also providing some amount of certainty. Most importantly, these phase outs are aspirational. Cut reductions are very unlikely to exceed or go faster than on this telegraphed path, but they are moderately likely to be less than delineated if the market is unable to absorb that new demand at prices that are favorable to OPEC+ country budgets. The latest inventory data in the US shows that demand is still not bad and that the market is quite tight, and one of the reasons that OPEC+ is looking to phase out cuts is losing market share to the US picks, and that's what IXC focuses on. We aren't too worried about the commodity picture currently, but we do think that the integrated oil and E&P focused IXC doesn't capture the full extent of opportunities in oil today in terms of margin of safety and valuation. IXC Breakdown 58% of the exposure in IXC is in the US market. A lot of these picks are quite focused on US shale, which is one of the areas in which supply is most likely to lead in the coming year. Half of the 1.6 mb/d increase in non-OPEC+ production, primarily the US, would be offset by cumulative OPEC+ cuts, according to IEA forecasts in April. The total increase in supply was expected to be around 770 kb/d according to the OPEC+ phase out plans, which represents less than a percentage increase in overall supply into the coming year. While we'd stick with the IEA figure for non-OPEC+ members, there should be incremental growth in OPEC+ supply as of the announcements these days. The increasing market share of US shale and non-OPEC+ supply growth has begun to irritate some of the OPEC+ members who have capacity that they'd like to utilize more, have plans to make new oil investments, or are dependent on oil revenues for financing government projects. UAE has been particularly belligerent, and the OPEC+ announcement seems to play in their favor considerably where they have had a level upgrade and are being able to more fully use their capacity. The details of the telegraph of OPEC+ is that they are going to continue supply cuts that would have expired this month into the third quarter, but then they'll start phasing stuff out. By January, around 750 kb/d will be back on the market. But prior and much larger 39 million caps that act as supply limits remain in place, and will do so until the end of the 2025 calendar year. Bottom Line Data by YCharts The price action has been pretty negative for IXC, which implies that there is concern that the market may not be able to absorb that additional capacity. On the margins, there could be meaningful changes in price if it's too much supply coming to the market. Currently, US crude inventories are lower than expected, meaning that today's price equilibrium is leaning towards tight, but that may not mean much over the coming 6–12 months as demand is broadly expected to fall as recessionary pressures from the persistently higher rate environment are expected to take hold. On the other hand, recessionary conditions like that may cause OPEC+ to abandon these phase out plans, which are aspirational and not set in stone. Recessionary pressures would be a reason for OPEC+ to keep supply low and let the assets trickle down at favorable prices that will finance domestic projects in OPEC+ countries, such as Saudi Arabia's major transformation and modernization plans, more efficiently. OPEC+ may not be scared of sustained market share losses, since it takes quite a long time before capacity can get built out, a rule of thumb is 2–4 years. There were some low-hanging fruits in the basin that have come online quickly, as they had been put on standby or virtually abandoned before when oil markets were worse, but more traditional exploration and development activities take time wherever they're done. It will be some years before the bulk of capacity that started to get built out in 2022 and 2023 comes online. In the end, we think the key factor is that oil is here to stay. The risks of stranded assets are less than they were, and there should be a general confidence that their reserves will be valuable for the long-term, and that there's no rush to get product sold. With a lot of OPEC+ countries' domestic plans hinging on high oil prices, such as Saudi Arabia whose plans are budgeted on a $100/barrel crude price, we don't think OPEC+ are going to get very irrational. We are quite confident that they will, at worst, just stick to their current telegraphed plan, if not abandon it for prolonged cuts.  While iShares Global Energy ETF is an interesting and entirely inoffensive value-weighted ETF, we think that oil offers better opportunities to more selective investors. We don't necessarily want to own refineries, and we'd maybe prefer the E&P stocks because they tend to trade at much lower multiples than the IXC, whose P/E is around 11x. E&P stocks can be routinely found at multiples less than 3-4x. Considering the cycle of capacity expansion, 3–4 years of time to get a payback with earnings seems pretty attractive, since supply only starts to really grow a year or two in from now.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2441478653"}