After reaching agreement to cut production between some of the world’s biggest oil producers in November last year, crude oil soared as much as 30% from US$42.20 to US$55 a barrel in just two months. However, in recent weeks, the crude price has dipped once again to trade around US$48 as concerns are raised over the fact that the OPEC’s cuts are not helping to drain a global oil glut quickly enough and that shale drillers in North America are ramping up production quicker than expected.
Here are some of the key things to be aware of…
- Resurgent US Shale Industry – As oil prices go up, inevitably it attracts shale producers to ramp up production to take advantage of the higher oil prices. According to Financial Times, after two years of contraction, the US shale industry sees output increasing from 300,000 barrels a day to 9.2 million barrels a day in 2017. Moreover, the industry has squeezed down costs during the downturn and efficiency and productivity are said to have been well improved, leading many to forecast an even bigger rebound.
- Stubborn Stockpiles – Despite OPEC’s goal to balance the market, US crude inventories are near record levels and the non-OPEC countries including Russia and Kazakhstan have lagged in delivering their promised cuts. There has also been a rebound in Saudi Arabia’s oil production last month. The market has grown doubtful about OPEC’s ability to clear the global glut.
- Falling Gasoline Consumption – According to Bloomberg, drivers in the US, the world’s largest consumer of petrol, are now consuming less, as a result of the 30% increase in oil since 2016. In the meantime, car manufactures now offer motorists an ever-widening variety of more efficient options to cut back fuel use.
On the flipside, though, although crude oil has pulled back quite a bit recently on the back of the recent increases in stockpiles and doubts over OPEC’s ability to control supply levels like it used to, the major Wall Street investment banks tracking oil markets still haven’t changed their bullish views on oil’s recovery.
“The outlook is no less bullish,” said global head of energy strategy at Citigroup, who predicts crude climbing to US$60 a barrel later this year. “Bringing oil inventories down is a messy process, but the OPEC cuts are real, demand in Asia is decent and ultimately the market is tightening.”
So should you be buying oil on this pull-back?
At UGC, we believe the visibility in the oil patch is too low to make a high conviction call on this sector right now. There are too many moving parts that are giving conflicting readings and we’d simply suggest sitting aside until some of this uncertainty clears.
However, if you feel your portfolio needs some energy exposure, perhaps its best to consider investing in energy infrastructure companies such pipeline businesses, which are much less susceptible to the price of crude and more exposed to volumes. They also typically pay above average distributions to shareholders.
If you want to learn how to invest in stocks safely and profitably, analyse the market and identify profitable and deadly turning points, contact United Global Capital today for a no cost, no obligation consultation on 03 8657 7640 or email [email protected] to learn more about Quality, Value, Trend (QVT) investment selection methodology.