Oil prices have been moving at a rampant pace over the last month.
While crude took a bit of a breather over the last few weeks, prices quickly resumed their ascent on concerns that a boost to supply won’t be enough to offset a growing list of supply issues.
In fact, since the middle of June 2018, oil ran from a low of $63.50 to $74 a barrel – its highest point in about four years thanks to OPEC’s underwhelming news of a smaller than expected increase in oil production.
While OPEC did approve a one million barrel boost to daily output, several cartel members said the actual increase would only reach 700,000.
“They came up short relative to market expectations,” said John Kilduff, a partner at New York-based hedge fund Again Capital LLC, as quoted by Bloomberg. OPEC and its partners are exhibiting a “lack of being aggressive about wanting to get oil prices down.”
Even the Saudis promise to boost production on President Trump’s request may not be enough to stem the oil price rallies. That’s because supply disruptions from producers like Canada and Venezuela, coupled with stronger global demand have significantly tightened the oil market in recent weeks.
Even Libya’s state-run oil company said it wouldn’t be able to honor contracts to deliver oil, widening shortages there, too.
Production in Venezuela is still plummeting because of the country's increasing economic instability. After producing 2.3 million bpd in early 2016, Venezuelan output was only 1.6 million BPD earlier this year and could fall by another half-million shortly.
And we must also consider there may not be enough spare capacity to make up for such supply disruptions, especially once U.S. sanctions reduce Iranian production.
With the combination of supply disruptions and high demand, “we are getting a preview of how the oil market will react when Iranian oil comes off the market,”said Ellen Wald, oil-market analyst and president of Transversal Consulting, as quoted by The Wall Street Journal.
From here, some analysts believe oil could run to $77 a barrel, note analysts at RBC Capital. “If we break above that,” they say. “Then there’s considerable room to run.”
The new worries could send oil prices to $90 by the end of 2018, notes Bank of America Merrill Lynch, which would be very bullish for related oil stocks. We have to consider that many oil companies will gladly cash in on the windfall when $90 oil materializes.
That means you want to start looking at oil stocks now while they are still in a very attractive oil price environment. Stay tuned to The Cheap Investor for more on how to trade the news.