Oil rallied 39% off February lows of $26.05 in recent weeks, lifting stocks like Exxon Mobil (XOM) and Chevron (CVX), but much of the rally is based on hope…
While I’d like to see a full-blown recovery in oil, the heavy supply issue is a bearish factor. And we have to understand that a Russia-Saudi Arabia freeze still won’t balance out the over-supplied and very drenched oil market.
What we also have to consider is this.
In January 2016, Saudi output was only 110,000 bpd more than in January 2014. Russia, too, was actually producing 50,000 bpd less than it was at that time, too. So, a freeze from both won’t have a significant overall impact.
If you look at the US production, it’s increased by 1.9 million bpd over that time. Iraq crude has increased by 1.7 million. And Iran has the potential to increase production by as much as one million barrels a day this year.
Yet, none of these countries have agreed to a freeze. In fact, Iran called the deal ridiculous… So oil is really only rallying on hope, not reality of the situation. And that’s what we have to be wary of.