The price of oil continued to rally this morning, topping $60 per barrel as the market digested news that OPEC will extend supply cuts through the rest of the year.
Energy leaders from Saudi Arabia and Russia met over the weekend ahead of the G20 summit in Japan, where “they discussed the options for extending the OPEC + deal, as well as the cooperation in the oil and gas sector between the Kingdom of Saudi Arabia and Russia,” the official Saudi Press Agency reported.
Oil prices have been under pressure since mid-April, as U.S. crude inventories and fears of a global economic turnaround have equally been building. That sell-off weighed down on oil stocks, with many falling 10% or more just in May. Notable among the decliners were Exxon (NYSE: XOM), which shed 16%, and Marathon Oil (NYSE: MRO), which lost 27%.
But an extension of the existing OPEC deal could keep crude prices lofty through the next six months. And traders, seeing the opportunity, snatched up oil stocks this morning. Energy Select Sector ETF (NYSEArca: XLE) was up more than 1.5% in pre-market trading.
Most individual oil producers also saw higher equity prices in pre-trading. But not by very much.
It seems traders aren’t overly excited to buy oil right now. And in some regard, it’s hard to blame them.
The price of oil has been quite volatile over the past several months. We’ve seen big jumps and dips in oil prices lead to nothing over the long term a million times before. It’s always the same: Some report about supply cuts comes out, Donald Trump tweets, the market freaks out, crude prices shoot up… then a week later everyone forgets and oil prices cool down. So why is it different this time?
It’s probably not.
But here’s what we can be pretty sure of: Oil prices are not going any lower than $50 per barrel any time soon.
The floor is $50. And that’s because that is what OPEC wants right now, presumably because any lower and they won’t make money.
Back in December, oil prices were nearing $50 per barrel, and OPEC simply announced extended supply cuts, putting crude back on an upward trajectory.
A week and a half ago, with crude flirting with $50 again, Iran shot down a U.S. drone. Coincidence? Probably not.
So what happens if crude prices start to slip again nearing $50? Well, they announce more supply cuts.
And if that doesn’t work, shoot down some more drones, “accidentally” send a warship into foreign waters, kidnap a few Western journalists… whatever it takes without launching a full-scale war.
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But at the same time, it’s very likely OPEC doesn’t want oil prices too high, either. If oil prices are too high, demand will suffer. But what’s worse is that an extended period of overbearing oil prices will create the conditions for OPEC’s own demise.
See, OPEC sells oil. If oil is overbearingly expensive, the demand for alternative technologies will develop faster. I mean, just imagine the demand for electric vehicles if gasoline was $20 per gallon.
So it’s in OPEC’s best interest to keep oil prices in a range: not too low, but not too high. That range seems to be $60 to $70.
As I said, back in December, OPEC announced supply cuts to boost prices. But just a few months earlier, with crude trading above $75 per barrel, the cartel announced supply increases.
Of course, none of this is a new game for OPEC. It’s been using its sway for decades to manipulate oil prices. But what’s important for us as investors is that apparent $60 to $70 range.
Right now, OPEC has just got oil over $60. My guess is they’ll allow prices to increase up to $80 before trying again to curb crude costs. So I think it’s a good time to be a buyer of oil stocks, even though they’re up a bit since mind-June. OPEC should let oil prices ride. And that should pay off for today’s investors.
Until next time,
Luke Burgess
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.
