Over the last four months, oil prices plunged by almost 50%, thanks to oversupply, trade war fears, and a stronger dollar.
They have since recovered slightly, and according to Goldman Sachs, an OPEC “shock and awe” campaign could force prices higher, near-term.
“Core-OPEC producers are adopting a shock and awe strategy, and exceeding their cut commitment,” says Goldman Sachs, as quoted by Bloomberg. “Disruptions have increased with risks that Venezuela’s production decline accelerates following the introduction of additional U.S. sanctions related to the Venezuelan oil industry. U.S. producers are also so far guiding towards restrained shale production growth.”
In fact, U.S. restrictions on Venezuela could remove as much as 300,000 barrels per day (bpd) from the market.
Goldman Sachs also points to improvements in oil inventories.
For example, the American Petroleum Institute (API) just reported that inventories fell by 998,000 in the week ending February 8, 2019, as compared to expectations for a build of at least 2.7 million barrels.
Even better for oil investors, Saudi Arabia Energy Minister Khalid al-Falih said production would fall below 10 million bpd in March 2019. That’s 500,000 bpd below initial targets.
Granted, U.S. production has been setting records.
As we reported the other day, while U.S. crude oil production will grow through 2020, it will do so at a slower pace, according to the U.S. Energy Information Administration.
“The dramatic fall in oil prices in the fourth quarter was largely driven by shale production surprising to the upside as a result of the surge in activity earlier in the year”, Schlumberger told investors, as quoted by Reuters. “The shale surge, combined with generous waivers from U.S. sanctions on Iran’s oil exports and the sharp fall in global equity markets, created a near perfect storm to close out 2018.”
Another consideration is that, if progress is made with the U.S.-China trade talks, we’re likely to see higher oil prices, near-term.
"We're bullish on commodities," said Jeff Curies of Goldman Sachs, as quoted by CNBC. "One, because you don't have the rising (interest) rates anymore, and in fact, they've come off, and they're on pause. Two, the dollar's really strong and likely to weaken from here as opposed to strengthen like it did last year." A weaker dollar makes oil more attractive, as oil is denominated in dollars explains CNBC.
We are searching for some quality, low-priced oil stocks to feature in The Cheap Investor.