By Avi Salzman
Oil stocks fell sharply on Monday because investors expect OPEC members to add back production before the end of the year, leading to a potential oversupply of crude.
Brent crude, the international benchmark, fell 3.4% to $78.36 per barrel, its steepest drop since December. Brent has been down four days in a row, taking 7% off the price. West Texas Intermediate crude, the U.S. benchmark, was down 3.6% to $74.22 per barrel.
The Energy Select Sector SPDR ETF was down 2.6%, its worst performance since April. Some oil stocks fell even more steeply, with Diamondback Energy, a large producer in the Permian Basin, dropping 4.3%. Chevron fell 3%.
Energy has had a rough few weeks, as oil and gas demand has been relatively weak. Energy was the only sector of the S&P 500 that fell in May.
OPEC and its allies, a group known as OPEC+, agreed on Sunday to continue holding about 3.6 million barrels of oil a day off the market until the end of 2025. But eight countries that had agreed to an additional 2.2 million barrels worth of cuts are expected to start to bring that production back this October, and gradually phase in full production over the next year.
In addition, the United Arab Emirates will be given a new baseline for production that could add back an additional 300,000 barrels a day next year.
RBC Capital Markets analyst Helima Croft called the decision a “plot twist” that will be “seized on by market bears.” But she cautioned the voluntary cuts could be rolled back if the market ends up being weaker than expected. Saudi Arabia accounts for the largest share of those cuts, so any decision will be in that country’s hands.
“We do not think they would go forward if market conditions deteriorated sharply from here given their stated emphasis on remaining ‘proactive, preemptive, and precautious,'” she wrote. “Hence, we see this as something of an aspirational taper schedule, not a binding course of action.”
Write to Avi Salzman at avi.salzman@barrons.com