OPEC+ Mixes Things Up to Start Q2

Articles From: Briefing.com
Website: Briefing.com

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Chief Market Analyst

The first quarter ended with a bang. The second quarter isn’t starting with one, however — at least not in terms of performance.

Currently, the S&P 500 futures are down five points and are trading 0.1% below fair value, the Nasdaq 100 futures are down 106 points and are trading 0.8% below fair value, and the Dow Jones Industrial Average futures are up 127 points and are trading 0.4% above fair value.

That is the look of a mixed market, which is seeing OPEC+ mix things up with a surprise announcement that it is going to cut production by about 1.16 million barrels per day starting in May and continuing through the end of the year.

This is a pre-emptive move aimed at mitigating further price declines that could result from weakening global demand. So far, so good for OPEC+: WTI crude futures are up 5.9% to $80.13 per barrel and Brent crude futures are up 5.9% to $84.56 per barrel.

An FT report, though, implies that this cut announcement could have some political undertones as Saudi Arabia was reportedly “irritated” that the Biden Administration did not purchase oil to refill the Strategic Petroleum Reserve.

In any case, oil prices — and oil stocks — are headed higher this morning. Dow component Chevron (CVX) is up 4.2% in pre-market trading and is playing a key role in the outperformance of the Dow Jones Industrial Average futures.

The broader market has been supported by some M&A activity highlighted by Endeavor Group’s (EDR) announcement that UFC and WWE (WWE) will combine to form a $21 + billion global live sports and entertainment company and Extra Space Storage’s (EXR) acquisition of Life Storage (LSI) in an all-stock transaction.

Overall, the broader market is on the softer side, keying off the weakness in the mega-cap stocks and a general sense that it may be due for a period of consolidation, having rallied 6.6% since March 13 in spite of a regional banking crisis that many pundits think will lead to a sharp economic slowdown, if not an actual recession that won’t bode well for earnings prospects.

To that end, the S&P 500 starts the second quarter trading at 18.2x forward twelve-month earnings, which is a 5% premium to the 10-year historical average of 17.2x, according to FactSet.

We would suggest a valuation headwind is serving as a bit of a restraint as the second quarter gets underway along with a general wait-and-see stance in front of the March ISM Manufacturing Index at 10:00 a.m. ET and the March employment report on Friday.

Originally Posted April 3, 2023 – OPEC+ mixes things up to start Q2

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