Oil prices could post a recovery after the OPEC decided to maintain its output target of 30 million barrels a day (mb/d) in order to keep oil price levels around $100/barrel.  The target could force Saudi Arabia to reduce its production. Over the recent past, Saudi Arabia has increased its output by 1.6 mb/d to cushion supplies as sanctions against Iran take hold. The OPEC is presently producing around 31.6 mb/d because of the Saudi intervention. Lower OPEC production can result in a rise in oil prices, which are key to Chevron‘s (NYSE:CVX) overall earnings.
We have a $109 price estimate for Chevron, which is at a 10% premium to its current market price.
The OPEC enjoys significant influence in setting the oil prices in international markets. The group coordinates output levels among different countries to limit the supplies to the market to keep prices from falling significantly. Over the past few months, Saudi Arabia has unilaterally raised its output to 10.6 mb/d, its highest level in 30 years,  to force down the price of oil as sanctions against Iran take effect. Some of the other OPEC members have asked Saudi to cut back on production to raise oil prices. Most OPEC members are producing at full capacity and need the oil prices to be high to balance budgets. On the other hand, Saudi holds significant spare production capacity and has historically favored higher production levels and moderate oil prices.
The Brent benchmark has fallen by almost 25% over its peak levels in March, when fears of supply shortages in light of the sanctions on Iran resulted in an increase in oil prices.  The decline in prices has been attributed to the increase in Saudi oil production and fears of a recession in the E.U. Lower oil prices can lead to falling revenues and profits for Chevron’s upstream business. Oil companies have benefited from higher prices over the past few quarters. With the OPEC taking steps to maintain a price level at around $100/barrel, companies can have a de-facto insurance against a major price drop because of a global economic slowdown or recession in Europe.
- OPEC Quota Uncertainty to Have Impact on Oil Prices (trefis.com)
- Brent rises above $98 after OPEC meet; Greece eyed, Reuters [↩] [↩] [↩]