OPEC Cuts… Further 

Oil Cartel’s Largest Producer Extends Supply Cuts 

OPEC+’s most powerful member, Saudi Arabia, surprised the market on the morning of September 5 by extending its one million barrel per day production cut through the end of the year. The consensus expectation was that this cut would extend only through October. Saudi Arabia will review its decision to lower supply output on a month-by-month basis, but the announcement caused crude benchmarks to rise over 2%. This extended cut results in Saudi Arabia’s expected crude production to be around nine million barrels for October, November and December. Saudi Arabia first implemented these cuts for the month of July but continues to extend.  

Russia decided to join in as well and extend its 300,000 barrel per day cuts throughout the end of the year. Both Russia and Saudi Arabia’s voluntary production cuts come on top of 1.66 million barrels per day of cuts that other OPEC+ members have put into place for the remainder of the year.¹ Saudi Arabia controls about 33% of total OPEC+ oil reserves, which explains why its voluntary cuts are so significant to the broader market.² It is worth noting that OPEC+ represents about 40% of the world’s oil production.³ 

Energy stocks have been a beneficiary of the OPEC+ constituent cuts, with the sector rising over 12% from the June crude oil low.⁴ If all market cap sizes are included, the sector is actually only 1% away from reaching a new high for the cycle. It is also worth noting that energy has outperformed every other sector by at least 800 bps since the 3% CPI print on July 12.⁵ Specifically, the oil and gas services group has been the main beneficiary within the broader energy sector, reaching absolute and relative highs. If these cuts also result in crude oil prices continuing to rise, this will further empower energy companies, allowing them to implement more robust dividends and buyback programs with their increased free cash flow.  

China and U.S. Economies Have Significant Implications for Oil Demand 

Broadly speaking, crude oil prices are based on supply and demand. The demand side may be a bit hard to predict, especially due to an unclear sentiment surrounding Chinese crude consumption, despite positive manufacturing data coming out of the country. Although Chinese exports to the U.S. and Europe are meaningfully below historic levels, exports to Asia and elsewhere are continuing to ramp up in a meaningful way.  

U.S. and China economies are significant when it comes to crude markets because they are the two largest consumers of crude: the U.S. consumed 19 million barrels per day in 2022 and China consumed 14 million barrels per day.⁶ 

The supply side of the equation is clearer at this point, further emphasized by the recent production cuts by these OPEC+ powerhouses. Supply is tightening. 

Chart 1: SPR Below 350 Million Barrels for First Time Since 1983⁷ 

The United States’ crude oil supply has been propped up by continuous strategic petroleum reserve (SPR) releases, which began March 1, 2022, and lasted until the middle of July 2023.⁸ But these additional barrels have largely been consumed and removed from markets. There are currently no more scheduled SPR releases, leaving crude oil inventories flat compared to the beginning of the year. 

Refined product inventories are also low. Distillate fuel inventories are 15% below their five-year average and gasoline inventories are 5% below their five-year average.⁹ This lack of new supply, combined with low inventories, should result in stable, if not higher, crude benchmark prices if demand is even remotely normal.  

Does Higher Oil Prices Hurt Homebuilders? 

Since oil prices are now +25.2% higher than the July bottom, we recognize that it will have some consequences for the homebuilder industry. As transportation, materials and energy prices will impact the bottom line. Despite higher cost expectations, the underlying dynamics of the short-supply housing market incentivize homebuilders to keep producing, especially since 40% of homes are off the market within 2 weeks, which is well below the 2019 average of 31%.¹⁰ 

Chart 2: United States 30-Year Fixed Mortgage Rate Has Continued to Climb Higher With Demand in 2023¹¹ 

The homebuilder’s results throughout the summer were impressive, as new home building has outperformed expectations this year. Much of the outperformance is attributed to consumer strength. Consumers appear willing to look past 20-year high mortgage rates for the opportunity to own their home. Sales of new single-family homes in July were up 4.4% sequentially and up 31.5% y/y.¹² According to some homebuilders, the momentum is still here as D.R. Horton (DHI), Lennar Corp (LEN) and KB Homes (KBH) have all raised guidance for the next quarter.  

Roughly four out of five homeowners have a mortgage rate below 5%, so it’s easy to see why existing home sales in the U.S. have underperformed new home sales.¹³ Results from homebuilders indicate that new homes comprise 35% of single-family for sale inventory, versus 12% pre-Covid. Existing homes are 48% below pre-Covid levels, as consumers are less willing to trade out of a favorable mortgage rate.¹⁴ 

Stephanie Link: CNBC TV Schedule 

Sources

1. CNBC. As of September 5, 2023.
2. Britannica. As of August 23, 2023.
3. Reuters. As of May 31, 2023.
4. Bloomberg. As of September 5, 2023.
5. Strategas. As of September 5, 2023.
6.  OilPrice.com. As of August 21, 2023.
7. FactSet (chart). As of August 29, 2023.
8. EIA. As of March 8, 2023.
9. EIA as of August 30, 2023
10. Realtor.com as of September 5, 2023.
11. FactSet (chart) as of September 5, 2023.
12. U.S. Census Bureau as of August 23, 2023. 
13. Redfin. As of June 14, 2023.
14. Goldman Sachs Research. As of August 30, 2023.

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