The energy sector has been the source of some interesting headlines in recent days. Last week the market was blindsided by a just over 1.1 million barrel a day production cut by OPEC, scheduled to take effect in May.
This follows a 500,000 barrel a day reduction from Russia that was announced in February. This also pushed oil back up to an $80 a barrel level even as natural gas prices in the United States remain in the doldrums.
Meanwhile, Warren Buffett is buying shares in Occidental Petroleum (OXY) hand over fist and the Wall Street Journal is reporting Exxon Mobil (XOM) might be eyeing a mega acquisition of Pioneer Natural Resources (PXD) . We will see if there is any fire behind that smoke in the weeks ahead. I personally think a deal of this size would face substantial regulatory scrutiny under the current administration and I don't believe it will happen.
Energy is one of the few areas in the market I have built exposure to in recent months within my own portfolio. While I continue to believe an economic recession is roughly a 50/50 proposition over the next year, there are several things that make oil producers attractive on a longer-term basis.
The birth of the ESG movement and greater focus on alternative energy has greatly lessened the amount of massive energy projects that take years to come online, and that have been funded over many years now. This will constrain supply over the longer term, resulting in a higher floor for oil prices.
The U.S. response to the Ukrainian invasion has undermined the case for the dollar as the global reserve currency and lessened the country's influence in key global oil producing regions. China's star has risen as a result, especially in the Middle East. Saudi Arabia is now accepting the yuan as payment for oil, a blow to the petrodollar. China also has brokered the reestablishment of relations between longtime rivals Iran and the Saudis. Given this, it is hardly surprising that last week's OPEC announcement caught the U.S. administration off guard.
This latest production cut triggered Goldman Sachs to raise its year-end Brent oil forecast to $95 a barrel from $90 previously. I will be adding Italian based energy giant Eni S.p.A. (E) to my energy holdings this week. The company's natural gas business has benefited by Europe trying to wean itself off cheap Russian gas imports.
This helped result in a record year of profits for Eni in 2022. The stock is also quite cheap on a cash flow basis and also sports a better than 3% dividend yield after just boosting its dividend payout 7%. The company has also just launched a significant stock buyback authorization.
And that is some background behind my first purchase of the new trading week.
