Earlier this year, runaway inflation and the threat of a war between major military powers delivered cynical benefits to energy stocks like Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM). However, with the Federal Reserve responding to upside pricing pressures and fears of a global recession rise, oil prices began declining conspicuously. To arrest this development, the Organization of the Petroleum Exporting Countries (OPEC) intends to cut production.
According to CNBC, both the oil cartel and non-member oil-producing allies (known as OPEC Plus) will meet in Vienna, Austria on Wednesday. The agenda focuses on the next phase of production policy. OPEC sources stated this past weekend the alliance seeks output cuts of more than a million barrels per day.
Naturally, such a move would likely spike oil prices, creating tailwinds for energy stocks. CVX and XOM each gained more than 4% during Monday afternoon trading.
Notably, the upcoming meeting will be the group’s first in-person talks since 2020. “The OPEC ministers are not going to come to Austria for the first time in two years to do nothing. So there’s going to be a cut of some historic kind,” said Dan Pickering, CIO of Pickering Energy Partners.
That’s the bad news for oil users. One of the rare silver linings in 2022 has been the cooling of gasoline prices from historic highs. Therefore, higher energy prices could hurt the broader economy.
The good news is Pickering anticipates the actual cuts will measure around 500,000 barrels per day. This is “going to be enough to support the market in the near term,” the expert stated.
The Politics of Bullishness in Energy Stocks
Energy stocks represent a key beneficiary of any OPEC Plus production cuts, thus allowing investors to mitigate the potential disruption through equity acquisitions. However, the cuts would also be a major setback for President Joe Biden’s administration. With midterm elections coming up, the cartel meeting could impose consequences for the Democrats.
As the New York Times mentioned, President Joe Biden earlier lobbied Saudi Arabia – OPEC’s de facto leader – to increase production. Moving in the opposite direction symbolizes significant reputational harm to U.S. leadership.
Last month, the Saudis signaled a hawkish position with a production cut of 100,000 barrels a day. However, analysts viewed the move as largely symbolic. Now, the oil-producing giant may be poised to deliver a stronger statement.
As the Washington Post reported in July of this year, President Biden promised throughout his campaign to hold Saudi Arabia accountable for its undemocratic actions, particularly human rights violations. Such a position also presented a contrast to former President Donald Trump’s closeness with Saudi leadership. However, Biden fell short of his campaign promises, attracting criticism for warmly greeting Saudi Crown Prince Mohammed bin Salman.
Therefore, the rise in energy stocks may have indirectly come at a great political cost to the Biden administration. If significant cuts materialize, the White House essentially got nothing for its friendly overtures, making this election cycle that much more consequential.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
