OPEC is going to raise output by 1m barrels per day in a Saudi-led decision. But what will that mean for prices and oil-related companies? One might assume that higher output would be bad for prices, but in this instance, likely not. The reason why is that the high output is offsetting lost production from OPEC members like Venezuela and Iran. Libya is also experiencing lower production. All told, the three countries may combine for a 1.5mbd to 2.3mbd drop by the end of the year.
FINSUM: This hike is really just a partial offset to a much larger decline that is going on. It seems like it would be wise to stay bullish on prices.
Oil prices are currently falling. The reason is fear of a supply glut. After several months of coordinated output cuts between the world’s oil superpowers, OPEC and allies are considering boosting total oil output. There is some contention within the group as to how much to boost production, but increased supply looks highly likely when the cartel meets tomorrow in Vienna. The spark for losses was news that Iran, which had been a hard-line critic of higher output, said it would be willing to accept a modest rise.
FINSUM: Prices have risen because of falling output in Venezuela and fears of a total supply shortage. However, that can be wiped out with the stroke of a pen. We expect prices will moderate.
Oil has been doing absolutely wonderfully this year. The OPEC countries, in harmony with other big oil producers, have successfully worked together to undermine the competitiveness of the oil market and succeeded in boosting prices (okay, that was a little cynical, but true). Now, that dearth of supplies may be about to change, as OPEC is considering a boost of up to 600,000 bpd. There is considerable disagreement over the possible boost, with Iran wanting to maintain the status quo, and Russia wanting to raise it. Saudi Arabia also wants to boost supply, and the highest figure being pushed is an increase of 1.5 mbpd. Open meets on June 22nd.
FINSUM: This could have a considerable impact on the market. Investors in oil and oil-related equities be aware.
The oil market has had a great year. US oil prices have risen from $45 a year ago to over $70 recently. Big oil producers have successfully worked together to constrain output in an effort to boost prices. However, that condition may be set to change. OPEC has already warned that it may have to increase supply for its member producers, and now the country has a meeting in Vienna next week where that eventuality will likely be decided. One portfolio manager put it this way, saying “OPEC countries will be contemplating production levels that could potentially tip the supply/demand balance currently in place, leaving crude oil pricing susceptible to oversupply”.
FINSUM: We do not think the global cooperation with producers will last, as each wants to boost production as a way of increasing revenue.
Oil is an enticing commodity right now. Global cooperation on constraining output has led to strongly rising prices, which coupled with margin improvements during the downturn, means the sector looks ripe for great profits. But where is the best place to put money? Barron’s has tapped a top fund manager for his picks, and they are interesting. Both picks are exploration and production companies, and are Kosmos Energy and Apache. The former is a South American E&P that focuses on offshore drilling, while Apache is Houston-based and focuses more on gas.
FINSUM: These are pretty contrarian bets on small E&P companies. These seem quite high risk/high reward.
Oil has been doing very well of late. All of our readers have probably noticed it at the pump. Brent crude is currently trading around the $80 per barrel market, and all parts of the oil sector are excited after a multi-year slump. However, the market has two big problems on its hands. The first is China’s secretive oil reserves, which could be used to push prices down if the Chinese start pushing their oil into the market. Secondly, The US oil industry wants to increase output significantly and has asked OPEC for a 1mbd hike, which would once again lead to an oversupplied market.
FINSUM: We acknowledge that oil is doing well, but we are worried it will be hard to maintain current pricing because it basically relies on an oligopoly structure (cooperation on price) which we don’t think is ultimately tenable.