Since early October 2018, oil prices have been clobbered.
Prices sank from a high of $76.90 to a recent low of $49.41, and major oil companies’ stock sank right along with it.
- Exxon Mobil (XOM) fell from $86 to $75
- Chevron (CVX) plummeted from $126 to $108
- Devon Energy (DVN) dropped from $46 to $27
- Conoco Phillips (COP) fell from $80 to $63
- Occidental Petroleum (OXY) dropped from $82 to $65
While many view the pullbacks as overkill, it wasn’t a major shock.
The world is still awash in oil supply. The U.S. is pumping at record levels and just passed Russia and Saudi Arabia as the world’s largest oil producer. In fact, the surge in U.S. supply to 11.475 million barrels a day is causing a good deal of concern.
Making things worse, there was an incredible glut of oil in November 2018, thanks to a ramp-up of production by Russia, the U.S. and the Saudis ahead of the Iranian sanctions.
Ongoing trade disputes threatened demand and growth.
And a stronger dollar, which now sits at 97.18 didn’t help either.
However, there are hopes that a turnaround in the oil market is nearing.
Just days ago, major oil producers agreed to cut oil production by 1.2 million barrels a day for the first six months of 2019. Of that, the OPEC cartel will eliminate 800,000 barrels per day.
Russia and other allied producers will cut up to 400,000 bpd.
However, there’s an issue when it comes to OPEC and Russia.
A deal may be in place, but not everyone will stick to it. OPEC is notorious for cheating on quotas.
“Uncertainty remains given the OPEC+ deal doesn't specify country allocations and exempts Libya, Venezuela and Iran, according to Goldman Sachs. While Morgan Stanley said the cuts will probably be sufficient to balance the market in the first half of next year, the bank sees limited upside to prices,” noted the Houston Chronicle.
According to Investor’s Business Daily, Russia has already announced that it may not be able to meet its agreed-upon cuts. Russian Oil Minister Alexander Novak explained that it would be difficult for Russia to cut oil production in the winter months.
Concern about the glut of oil and cheating on quotas are the primary reasons why oil prices haven’t moved much since the deal was put in place.
One thing is for certain, though. Oil stocks have gotten very cheap, so we will be searching for bargains to include in the newsletter over the next few months.