Thursday's OPEC meeting in Vienna has brought the usual speculation among oil industry pundits and the usual volatility in oil futures, which are trading down today. The most important factor in this meeting is the presence of non-OPEC oil ministers (officially the "OPEC and non-OPEC Ministerial Meeting.") These "OPEC Plus" side meetings are a relatively new phenomenon and this is only the third time there will be such a meeting in addition the regular OPEC plenary session.
If the presence of Russia, Mexico and other oil producing nations (though not the U.S, of course) is the most noteworthy factor in the OPEC meetings, the least noteworthy factor is also easy to identify: the meetings themselves. I was sitting in a rodeo hall in Midland, Texas a few years ago and legendary oil industry analyst Tom Petrie made the following comment: "OPEC meetings are scripted in advance." So, despite the pundits' comments and the air-filling shots on CNBC and Bloomberg of reporters standing outside OPEC's headquarters in Vienna, there is very little chance of any change in OPEC Plus strategy at these meetings.
If the meetings themselves are not investable, one must analyze OPEC's current strategy and assume that current trends will continue. OPEC members are complying with the cartel's production cut directive. OPEC issues a monthly press release from its Joint Ministerial Marketing Committee (JMMC). As of October 21st, the JMMC reported that the cartel's compliance with production cuts was running at 120%, which would imply 2.15 million barrels of oil per day have been taken out of production since the "voluntary adjustments" agreed on November 20, 2016 amounted to a cartel-wide production reduction of 1.8 mm bpd.
I agree with those who view any OPEC statistic with a healthy dose of skepticism, but it is difficult to argue with the results. According to the JMMC:
"Commercial oil stocks in the OECD fell further in September and the difference to the latest five-year average has been reduced by 178 million barrels since the beginning of this year, however, there remains another 159 million barrels of stock overhang to be depleted."
Translation: the cuts are working, and we need to maintain them. Anyone betting on a change in that paradigm on Thursday is destined to be disappointed.
So, with a "stay the course" strategy prevailing from OPEC, I would expect current pricing trends to continue. OIl prices are clearly in an uptrend and the best way to measure that is to ignore the front-month contract and look at future months. On August 31st, the December 2018 WTI futures contract closed at $47.72. Today it is trading at $55.59. That 16.5% gain is the real evidence that the oil markets are at or near equilibrium, and is much more important than the real-time reading of the front-month contract.
The U.S. oil futures market is heavily backwardated at this time (the December 2017 contract is quoted at $58.21 versus the quote of $55.59 for the December 2018 contract), and due to the storage requirements for the commodity, I do not believe that can last. That said, there is no U.S. producer that I know of that cannot hit its return thresholds at $55/barrel oil, and one could lock that in for a year today with a few mouse clicks.
So, if we know oil is going to be sold at a profitable level for the producers a year from now, the logical investment strategy is to try and grab as much of those profits as possible. Dividends are profit sharing, and the major oil companies continue to sport major yields. The Nasdaq and Bitcoin may be carrying the day today, but in terms of real cash returns on one's investments the five global oil majors will continue to lead the pack. No industry can match the absolute dollar amounts paid to shareholders by the oil majors, and in this tech-friendly environment, the percentage yields are higher than they should be given the shift upward on oil prices.
The Big 5 are good buys ahead of the OPEC meeting and continue to be attractive long-term holds. Current yields are presented below:
Exxon Mobil (XOM) 3.80%
Chevron (CVX) 3.74%
BP (BP) 6.06%
Royal Dutch Shell (RDS.A) 6.08%
Total (TOT) 4.82%
