Investors are just beginning to push back into oil stocks for five powerful reasons.
No. 1 – Goldman Sachs Argument for Higher Oil Prices
“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.”
No. 2 – Falling Crude Oil Supply
According to the U.S. Energy Information Administration (EIA), crude fell by 9.6 million barrels in the week ended March 15, as compared to expectations for an 800,000-barrel build. The number also surpassed estimates from the American Petroleum Institute, an industry group, for a 2.1 million-barrel decrease.
No. 3 – Tightening Global Supply
Reductions in global production led by OPEC, along with supply declines in Iran and Venezuela, continue to support the oil market. Members of OPEC and other major oil producers, including Russia have pledged to curb oil production by about 1.2 million barrels a day from October 2018 levels for the first half of the year to prop up oil prices.
In addition, the Saudis need higher oil prices.
According to the International Monetary Fund (IMF), the Saudis need much higher prices to see a breakeven budget for 2019. “If you take the (2019) budget as presented with everything remaining equal, a breakeven point would be around $80-$85 dollars,” Jihad Azour, director of the IMF’s Middle East and Central Asia department, told Reuters.
No. 4 – Even Hedge Funds are Increasingly Bullish
Hedge funds have turned bullish, as well.
“In the bond market they say don’t fight the Fed and I think in the oil market the motto is don’t fight the Saudis,” said John Kilduff, partner at Again Capital LLC, as quoted by Chron.com. “Hedge funds are siding with them and banking on them to deliver on withholding supplies to the U.S. in particular, but also on a global basis.”
Hedge funds’ WTI net-long position -- the difference between bets on higher prices and wagers on a drop -- climbed to 212,317 futures and options, the highest since October, according to U.S. Commodity Futures Trading Commission data.
Catalyst No. 5 -- Venezuela Supply Woes
The most recent blackout marks the second such widespread blackout in less than a month and even reached the capital city. This time around, Venezuela’s oil operations once again could be further jeopardized. Adding fuel to the fire, tensions between Russia and the U.S. are increasing in the region, which could be another big catalyst.
No wonder investors are just beginning to push back in.