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Exxon Mobil Stock: OPEC deal can’t torpedo Bear case (NYSE: XOM)

David McNew

WTI crude oil prices are skyrocketing, benefiting oil companies such as ExxonMobil Corporation (NYSE: XOM) (“Exxon Mobil”).

OPEC’s decision to limit the supply of crude oil by agreeing to production limits sent WTI crude oil price above $92 at the end of last week, implying that oil companies face a better near-term earnings picture.

That said, I believe that the recent increase in crude oil market prices is temporary and the result of a growing fear premium, which has never been sustained for an extended period.

I believe ExxonMobil’s earnings peaked in the second quarter, and OPEC’s decision is not a game changer. Investors chasing the stock price above $100, in my opinion, may be disappointed.

OPEC production decision leads to price spike

WTI crude oil prices rise again, reflecting concerns over crude oil supply after OPEC signaled to the market its intention to cut production by 2 million barrels per day, despite the fact that the actual level Supply reduction could be around 1 million barrels per day due to underproduction in countries like Russia, Venezuela and Iran.

In a major strategic shift, OPEC aligned itself with producers such as Russia (OPEC+) and announced a production cut, pushing the price of WTI to around $93 a barrel on Friday.

WTI Crude Oil also broke above the 50-day moving average, signaling a short-term bullish buy signal that may indicate that WTI prices will continue to rise.

Additionally, if the price of WTI Crude Oil breaks above $97, where the 200-day moving average currently stands, WTI Crude Oil could easily cross $100 a barrel again, potentially challenging its most recent June 2022 high. , when the price briefly rose. above $120 a barrel.

WTI trend

WTI (StockCharts.com)

As bullish as the chart pattern may appear, the current recovery is likely to be transitory as the global economy faces a potentially toxic economic cocktail of high inflation (loss of purchasing power), interest rates high and a slowing labor market.

Given that the United States economy entered an unofficial recession in the first six months of 2022, it is likely that a slowdown in economic growth will translate into slower or even lower demand. crude oil and refined products.

Given that the economic hurdles are likely to be greater than the market is willing to admit, I believe ExxonMobil’s earnings peaked in the second quarter.

ExxonMobil’s net income was $17.9 billion in 2Q-22, up $13.2 billion from the same period a year earlier. ExxonMobil’s profits also rose, with the company earning $12.4 billion more than in 1Q-22.

During “normal” price periods, I think ExxonMobil’s base level of profitability is around $5-6 billion per quarter. The current level of profitability is only possible during bull markets and is not sustainable whether or not OPEC cuts production.

Exxon Mobil Earnings

Earnings (ExxonMobil)

Slowing Economic Growth Indicates Falling WTI Crude Oil Prices

The American economy has created 263K jobs in September, less than the 315,000 jobs created the previous month. Slower job growth indicates sluggish economic growth, which will eventually result in less aggressive production and lower crude oil prices.

Why I could be wrong about ExxonMobil

There are several warning signs in the US economy (interest rates, inflation, GDP growth among them). The labor market is clearly weakening, but it is not yet in crisis.

The unemployment rate in the United States was 3.5% in September, indicating full employment, and it even fell by 0.2 percentage points compared to August.

If the central bank succeeds in controlling inflation without pushing the economy into recession, higher WTI crude oil prices could be sustained for longer, improving ExxonMobil’s earnings outlook.

A sharp rise in unemployment numbers, on the other hand, would most likely indicate the opposite: worsening economic headwinds, rising unemployment and falling crude oil prices.

US unemployment rate

Unemployment rate in the United States (The Washington Post)

XOM shares are trading at a likely inflated P/E ratio

ExxonMobil’s P/E ratio is unreliable, which is probably my biggest concern right now. According to Finviz.comExxonMobil has a forward P/E ratio of 9.3x, but only because earnings projections for 2023 are extremely optimistic.

The consensus average for ExxonMobil’s earnings is $10.91, which might not be a realistic estimate if WTI crude oil prices fall 50%, which I think is more likely than not given given the slowdown in the US economy.

My conclusion

Investors should avoid chasing ExxonMobil’s stock price here solely because of the OPEC deal.

WTI crude price increases in response to short-term production cuts are rarely sustained, and the overall economic trajectory points to a cooling US economy.

Inflation, interest rates and slowing economic growth are key risk factors that are currently overshadowed by OPEC’s decision to cut production in order to maintain price stability. While this strategy may be successful in the short term, broader macro trends point in the opposite direction.

ExxonMobil’s upstream earnings likely peaked in the second quarter, when oil prices were well above $100 a barrel. Do not continue.