The 18 members of OPEC and OPEC+ have reached an agreement to keep oil production at its current levels until March. The news sparked a surge in crude prices yesterday and reinvigorated my expectations that prices will hit $60 per barrel, and soon.
Brent crude was up 4.13% early Tuesday and West Texas Intermediate (WTI) soared as high as 5.1%, briefly eclipsing $50 per barrel through midday trading.
It’s been 10 long months since oil prices have reached this level.
Source: OilPrices.com
Now, I was already on record saying cooler heads would prevail during these talks. But I certainly didn’t expect such a positive resolution this quickly.
On Monday it appeared the leaders of OPEC+ were locked in opposition, with the Saudis and other members wanting to keep production levels the same, and Russia and its allies preferring to increase output by 500,000 barrels per day.
But in a surprise to many on Tuesday, not only did Russia agree to keep overall production levels steady, but the Saudis announced they would decrease their own output by 400,000 barrels. This concession was made in order to offset part of the agreement that would allow Russia and Kazakhstan to increase production by a combined 75,000 barrels a day, according to Bloomberg.
A perfect win-win.
And just like I predicted last month, the stars are aligning for a larger surge in oil and energy stocks.
Oil Prices Will Surge — but Against a Volatile Backdrop
A key component of the bull case for oil and oil stocks — more specifically Saudi Arabia, Russia, and Iran finding a way to work together and keep production levels down — fell perfectly into place Tuesday.
With insurances now in place that rogue producers won't upend the market, $60-per-barrel prices are well within reach. That said, oil’s rise to $60 won’t be in a straight line.
We still have to manage the COVID-19 factor, including potential vaccination delays, as well as new resistant strains of the virus. Patience and not overreacting to headline noise will be the key to profiting off the rise in oil and energy stocks over the next few months.
That means we need to temper our optimism about the vaccine rollout as it relates to the demand for oil to some degree.
Yes, the vaccines work, yes, we have three of them now, and yes, they’re being administered as quickly as possible. But it is going to take many more months, even upward of a year, to get enough people vaccinated to return to normalcy.
Moreover, the oil industry is only beginning to recover from a nearly yearlong drawdown that saw prices fall over 20% from pre-COVID highs.
Secretary General of OPEC Mohammad Barkindo recently noted, “We are only beginning to emerge from a year of deep investment cuts, huge job losses, and the worst crude oil demand destruction on record.”
As such, the industry is in a delicate state. Small changes in production have a much greater impact on prices right now. Which means oil’s rebound can't be forced and isn't going to happen overnight.
After accepting that fact, you can see why Tuesday’s decision to hold production levels steady is such a big win for the oil industry and energy investors. It’s a much more sustainable plan for the industry's recovery compared with Russia’s preference to further ramp up production.
And with OPEC officials still anticipating demand to increase from a low of 5.9 million barrels a day right now to almost 96 million per day by the end of 2021, the sector should offer some great returns in the coming months.
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