A drop in production is bad for pump prices, but it’s good news for small-cap oil stocks.
Earlier this month, Saudi Arabia announced it will extend its voluntary cut of 1 million barrels of oil per day for 3 months to include October until the end of December 2023. The production cut began in July, which partially explains the recent increase in oil prices.
U.S. consumers are already feeling the pain at the pump. Unlike the last couple years, however, the U.S. Strategic Petroleum Reserves (SPR) won’t be able to do much to suppress gasoline prices. (That’s not why it exists anyway.)
The SPR is at its lowest level since 1983. It has dropped about 43% in just the last 2 years (source: The Kobeissi Letter).
All of this is bullish for small cap oil stocks. They’re trading at extremely low valuations, but more importantly, they’re sitting on oil reserves.
In the April issue of the Blend Portfolio, I explained why these stocks are so appealing. Here’s a portion of what I wrote then:
When you compare the amount of natural gas and oil that smaller companies have in relation to the size of their market cap, they become prime targets for acquisition.
Think it from the perspective of the oil majors like ExxonMobil and Chevron.
It’s already extremely difficult and expensive to explore and find new assets/reserves. When you factor in the negative sentiment from politicians, the general public, and banks, you have a regulatory nightmare on your hands as well.
Since that’s the case, why even bother with exploration?
It’s much easier and cheaper to buy a smaller company that has tremendous reserves relative to its market cap.
In light of this, I recommended 2 small-cap oil stocks to premium members. Both are crushing the S&P 500, with one of them tripling the performance of the index.