Investing.com - While energy stocks have been struggling due to stagnant oil prices, a surprising source of support might come from deflation. Oil prices have remained within the $68-$75 range since May, despite Saudi Arabia's announcement in June that they would cut crude oil production by 1 million barrels per day.
However, there is only so much influence Saudi Arabia can exert on global oil markets when considering factors such as China's economic slowdown and Russia's need for revenue from selling oil at any price point. Edward Yardeni, president of Yardeni Research, suggests that a stable price might be the best outcome for Saudi Arabia.
Despite unimpressive gains in oil prices this year compared to 2022, flat prices could still provide ample earnings potential for producers if costs are managed effectively. Last year's boom came with increased expenses related to labor, drilling equipment, and other resources required for the extraction and processing of fuel sources; however, these costs may begin to decrease as inflation subsides.
Energy stock performance has lagged behind other sectors this year but lower valuations present an opportunity for investors seeking value opportunities in US-based shale drillers who are expected to benefit from reduced operating costs in the coming months. Citigroup (NYSE:C) analyst Scott Gruber estimates overall cost reductions of around 10% by 2024.
Companies like Devon Energy Corporation (NYSE:DVN) and Marathon Oil Corporation (NYSE:MRO) stand out as major beneficiaries due to their shorter-term contracts expiring later this year which will allow them to renegotiate terms amidst falling market rates; however, not all companies will experience equal benefits according to Gruber - Diamondback Energy Inc (NASDAQ:FANG) and EOG Resources Inc (NYSE:EOG) may receive lesser advantages due to excelling during inflationary periods or longer-term contract commitments limiting reduction potential.
Although revenues are likely going down due to lower oil prices, the improved profit margins from deflation could provide a much-needed boost for the energy sector. This overlooked strength may offer new opportunities in an otherwise unloved market segment this year.