OPEC+ Is About to Pause Oil Output Hikes. Here's What It Means for Oil Stocks.

OPEC+ appears poised to pause its phased output increases after September. The group of OPEC members and several large oil-producing non-members have been steadily raising their collective output due to a severe supply shortage caused by the war with Iran. However, according to a Reuters report, it doesn’t plan to make any additional changes this year.

Here’s a look at what this could mean for oil stocks.

Image source: Getty Images.

Rollback reversed

Core members of OPEC+, which includes Saudia Arabia, Russia, and Iraq, will meet early next month to set their output target for September. The group expects to increase their production target by about 188,000 barrels per day (BPD) for September. That’s the same monthly increase as June, July, and August. OPEC+ members have been increasing their production quotas due to the impact of the war with Iran on the oil market.

The September increase would mark the end of their phased rollback of a 1.65 million BPD supply cut that the group agreed to in 2023 to boost oil prices. They have been steadily increasing their collective production allotment this year to help offset the impact of the Strait of Hormuz disruption on supplies. However, while OPEC+ has agreed to increase output, several members continue to struggle to get oil to the global market due to supply disruptions. For example, Iraq’s oil output has plunged from 4 million BPD before the war to around 1.4 million BPD.

OPEC’s strategy of limiting member production has already led the UAE to leave the group this past May. Meanwhile, Iraq recently threatened to leave OPEC if it couldn’t increase its output. OPEC’s decision to maintain its production after September through the end of the year could hasten Iraq’s departure, especially if OPEC doesn’t boost its production quota for 2027.

The potential impact on oil stocks

OPEC’s likely decision to pause additional output cuts could impact supplies later this year. The Strait of Hormuz has remained disrupted, forcing the oil market to burn through oil inventories and emergency stockpiles. The economy will eventually need to refill these shock absorbers, which could keep crude prices elevated. Goldman Sachs recently warned that oil could top $120 a barrel in the near term and average $100 next year if current disruptions persist. Higher oil prices would enable oil companies to make even more money.

Another potential impact from OPEC’s decision is that it could ultimately drive Iraq to leave the group. That could have meaningful implications for several major oil companies.

Chevron (NYSE:CVX) is working towards agreements to enter the Iraqi oil market. It recently signed memorandums of understanding with its government covering two oil fields, including the potential assumption of operational control over the large West Qurna 2, which alone accounts for 0.5% of global supply and 10% of Iraq’s output. Chevron is also considering a pipeline to bypass the Strait of Hormuz. If Iraq leaves OPEC or receives a meaningful increase in its production quota, it could enable Chevron to accelerate production growth in the country.

Meanwhile, fellow U.S. oil giant ConocoPhillips (NYSE:COP) recently agreed to buy a 42% interest in BP Energy Company of Kirkuk. That investment will help support the ongoing development of four large-scale oil fields currently producing in the country. The fields hold an estimated 3 billion barrels of oil that the companies can recover through rehabilitation, redevelopment, and optimization activities. There’s also additional exploration potential. If Iraq can produce more oil in the future, it could enable ConocoPhillips and BP to invest more money and increase production more quickly.

A pause has potentially meaningful long-term ramifications

OPEC+ seems likely to pause any additional production increases after September. That could impact the oil market later this year as the global economy seeks to rebuild stockpiles caused by the current supply disruption. Meanwhile, it could have a longer-term impact if it drives Iraq to follow the UAE’s lead and leave the group. That would allow the country to increase production at will, potentially benefiting Chevron and ConocoPhillips. This potential catalyst makes OPEC’s future moves worth watching as it could have a meaningful impact on oil stocks.

Matt DiLallo has positions in Chevron, ConocoPhillips, and Goldman Sachs Group. The Motley Fool has positions in and recommends Chevron and Goldman Sachs Group. The Motley Fool recommends BP and ConocoPhillips. The Motley Fool has a disclosure policy.