OPEC's production cut is a win for oil stocks

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By Nicole Goodkind • Friday, October 7

Good morning. In today's newsletter: A lot of people are unhappy with OPEC's move to limit oil supplies, but energy stocks are thriving. Plus, what you need to know ahead of the September unemployment report.

US stock futures are struggling to find direction ahead of the jobs report. Markets in Europe are edging higher, after a downbeat day for stocks in Asia.

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What's happening now in markets:

▲ Dow futures 30,005 (+0.08%)

▼ S&P futures 3,752 (-0.12%)

▼ Nasdaq futures 11,491 (-0.44%)

▲ US 10-year yield 3.826%

▼ Gold $1,715.80 (-0.29%)

▲ US oil $89.45 (+1.13%)

▲ Bitcoin $19,967.21 (+0.01%)

MARKET DATA AS OF 6:35 AM EDT

MARKET FLASH

OPEC's production cut is a win for oil stocks

The White House isn't very happy with OPEC's decision to slash oil production by 2 million barrels per day. Consumers won't be big fans either, as the move will most likely send gas prices higher.

But there's one big winner coming out of the ordeal: Oil stocks.

What's happening: The cartel of major oil producers and its allies, led by Saudi Arabia and Russia, announced on Wednesday its biggest production cut since the start of the pandemic. The reduction, equivalent to about 2% of global oil demand, won't begin until November, but prices received an immediate boost.

Oil prices rose to three-week highs after the announcement. Brent crude, the international benchmark, was hovering just below $95 per barrel on Friday morning, up about 6% since Monday.

US oil and gas stocks have flourished as a result. The S&P 500 energy sector — which includes stocks like Exxon Mobil, Chevron and Phillips 66 — is up nearly 15% for the week, while the index as a whole is up just 3.7%.

That's because supply cuts mean higher profits for energy companies. "Big picture, this means higher oil prices and higher cash flows," said Stephen Ellis, a senior analyst at Morningstar. The production cut will lead to higher dividends and stock buybacks among energy companies, he said.

So far, energy companies have had an exceptional year.

Exxon Mobil is up more than 60% year to date, Halliburton is up nearly 25% and Occidental Petroleum, boosted by Warren Buffett's Berkshire Hathaway drastically increasing its stake in the company, is up 127%. The S&P 500 is down about 22% for the same period.

The big picture: Energy companies in the United States and Europe have made eye-popping profits this year as supply crises raise crude oil prices.

Exxon's profit, excluding special items, came to $17.6 billion in the second quarter of 2022, up 273% from the same period a year ago. Chevron's second-quarter profit similarly rose by 277% from the year prior.

Energy companies have largely used those profits to attract and reward shareholders — making their stocks all the more attractive. Major oil and gas companies are on course to repurchase near-record levels of shares this year. Estimates from Bernstein Research show that the seven largest companies, including Exxon Mobil, Chevron, BP and Shell, are poised to return $38 billion to shareholders through buybacks this year. That would be almost quadruple the $10 billion in buybacks completed in 2021.

"Companies are much more focused on shareholders than they have been in the past," said Quincy Krosby, chief global strategist for LPL Financial. "As a result, the sector is being rewarded. The overall analyst consensus is that clients should invest in these companies, even when they sell off."

The takeaway: The energy sector single-handedly saved the stock market in the second quarter, and it appears on track to do the same this quarter. This OPEC announcement could make 2022 the year of big energy.

VOICES

Peloton undergoes fourth round of layoffs to 'save' company

"This is a necessary step if we are going to save Peloton, and we are."

BARRY MCCARTHY, CEO OF PELOTON

Read more from CNN Business.

ECONOMY WATCH

Here comes September's unemployment

Investors are holding their breath this morning as they await the release of the Bureau of Labor Statistics' latest monthly jobs report.

All eyes will be on whether the labor market is showing signs of loosening up — one of the most crucial factors that will help the Federal Reserve determine its next steps in the fight against decades-high inflation.

The US economy is expected to have added 250,000 jobs in September, which would be the lowest monthly jobs gain since December 2020, according to Refinitiv estimates.

If numbers come in as estimates suggest, investors will likely be very happy. A weakening labor market will exert downward pressure on wages and inflation. That means the Fed's policy is working and that it might pivot away from aggressive interest rate hikes.

August jobs data already indicated that the historically tight labor market has loosened by a notch, reports my colleague Alicia Wallace. The jobs report for that month found that America added 315,000 positions, a much lower level than the 512,000 average monthly gain over the past 12 months.

But while the hotly anticipated headline jobs number is falling, it's still robust, BLS data shows. The monthly average prior to the pandemic was around 200,000.

UP NEXT

The US Bureau of Labor Statistics releases its September jobs report at 8:30 a.m. ET.

Coming next week:

▸ Third quarter earnings season begins. Expect reports from big banks like JPMorgan Chase, Wells Fargo, Citigroup, Morgan Stanley, PNC and US Bancorp and consumer staples like Pepsi, Walgreens and Domino's.

▸ CPI and PPI, two closely watched measures of inflation in the US are also due to be released.

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WHAT WE'RE READING AND WATCHING

▸ The Twitter-Musk trial is now on pause (CNN Business)
▸ In global slowdown, China holds sway over countries' fates (NYT)
▸ Ford raises price on the electric F-150 again (CNN Business)
▸ Biden to pardon thousands convicted of marijuana possession (WSJ)
▸ ECB warns of potential for 'self-reinforcing' inflation (FT)
▸ Big companies keep leaving Chicago. What's going on? (CNN Business)

FINAL WORD

The corner of Wall Street and Pennsylvania Avenue

The midterm elections are a little more than a month away, and Wall Street is hoping for gridlock.

That's because investors actually prefer it when politicians bicker and little actually gets done, reports my colleague Paul R. La Monica.

Power splits in DC mean big returns in NYC. According to data from Edelman Financial Engines, the S&P 500 has had an annualized return of 16.9% during the nine years since 1948 when a Democrat was in the White House and Republicans had a majority in both chambers of Congress.

"Should Republicans take the House at a minimum, equities are likely to react positively based on the proposition that continued gridlock in Washington is good for business due to the absence of major tax and policy changes," Daniel Berkowitz, senior investment officer for Prudent Management Associates, said in a report.

But investors shouldn't sweat the election outcome too much. Stocks tend to go up over the long haul — regardless of politics. The average annual market returns since 1948 during periods of full Democratic control is a still solid 15.1%. Stocks posted an average 15.9% gain when Republicans were in charge.

The bottom line: Markets should worry less about election results and more about the elections themselves. Dan Clifton, head of Washington research at Strategas Asset Management, noted in a report that the S&P 500 has declined, on average, by about 19% in midterm election years prior to votes being cast. But the market then tends to bottom by October.