U.S. oil E&Ps to underperform on OPEC+ plan to restart production, experts warn

Investing.com -- OPEC+ announced on Monday it plans to phase out voluntary production cuts starting in April 2025, sending oil and gas stocks tumbling.

The oil-producing alliance said it intends to gradually eliminate the cuts of 2.2 million barrels per day (mmbpd) established in November 2023, a move that comes after the group delayed the restart of production three times, with markets largely anticipating another postponement.

The news has led to a decrease in forward strip prices for the years 2025 and 2026, by 1.5% and 0.9% respectively. The SPDR® S&P Oil&Gas Exploration&Production ETF (NYSE:XOP) (XOP) saw a sharp drop of 4.8%, outpacing the decline in the S&P 500 index, which was down by 1.8%.

On average, oil-weighted equities within the coverage universe dipped by 6.4%.

OPEC+'s voluntary production cuts have been a critical factor supporting oil prices, as non-OPEC+ production growth has exceeded global demand growth by 1.0 mmbpd since 2022.

With the planned production increases, analysts at Texas Capital Securities forecast an oversupply in oil markets for 2025, estimating the market to be 0.4 mmbpd oversupplied, with the fourth quarter of 2025 potentially reaching an oversupply of 1.2 mmbpd. For 2026, the oversupply could extend to 1.4 mmbpd.

In terms of pricing, supply and demand balances indicate that strip prices “need to move meaningfully lower to impair non-OPEC+, short-cycle production growth,” analysts led by Derrick Whitfield said in a note.

The investment bank estimates that by the end of 2025, Brent crude could stabilize around $65 per barrel, but may drop to approximately $45 per barrel by the end of the second quarter of 2026.

“While oil prices are fundamentally supported based on OECD inventories, we believe the forward curve needs to move lower to ration supply. Further, we believe the severity of the price response is contingent on the position the Trump Administration takes with Iran,” analysts noted.

The potential impact on cash flow for the industry is also a concern. With a hypothetical scenario of $50 per barrel for West Texas Intermediate (WTI), average cash flow revisions for 2025 could decrease by 14%.

“Given our view strip prices need to move lower, we believe investors are likely to remain on the sidelines with oil-weighted equities in the near term,” analysts continued.

Texas Capital holds a positive view on Comstock Resources (NYSE:CRK) and Expand Energy Corp (NASDAQ:EXE), which have significant exposure to the Haynesville region, due to the expected benefit from the decrease in associated gas volumes, which could support natural gas prices.

This article first appeared in Investing.com