The Comeback of Oil

By Eric Reuben

 

Oil prices have been declining consistently for the past three years, but events this week indicate the market may rebound. The market has reached an eight-month high and many predict the industry will stabilize.

Brent crude is a trading classification tracking various oil prices from the North Sea used as an international benchmark in measuring oil prices. Last week, Brent crude topped $60 a barrel for the first time in more than two years. The price of Brent crude has increased 38 percent since June 2017. The US West Texas Intermediate, a major national benchmark for oil prices, rose to $55.64 a barrel, the highest mark since July 2015.

Supply cuts in the U.S. and abroad have caused oil prices to rise. The Organization of Petroleum Exporting Countries (OPEC) struck a deal with Russia last March limiting oil production in which world leaders vowed to cut 1.8 million barrels of production every day. Meanwhile, in the past week, U.S. energy companies have cut eight oil rigs dropping the count to 729.

The oil market is also supported by strong demand. China has recently surpassed the U.S. as the largest importer of crude oil at 9 million barrels per day, and demand continues to rise in the country. Additionally, the US exports rose to 2.1 million barrels per day, a new record.

Oil prices are having a direct and significant impact on stock prices. BP shares are trading at their highest point since 2014. Major oil companies are projected to report strong Q3 earnings as shares of EXONN and Chevron rise.

OPEC will meet again on November 30th in Vienna. Given the success of their recent regulations in sparking an industry wide rebound, another agreement will likely be reached limiting oil production beyond 2018. There is growing support for this initiative. Iraq, Saudi Arabia, and Kuwait, which combine for over 50 percent of OPEC’s oil supply, are in favor of limiting supply. Russia has also showed strong support for a new deal.

Even if there is no longer oversupply, assuming OPEC reaches a new agreement, oil is still impacted by geopolitical risk. Venezuela, a major producer of oil, suffers severe financial instability and continues to default on debt. Iraq’s unrest with Kurdistan has impacted its crude production and exports.

While it is unlikely oil will completely rebound, assuming another OPEC agreement is reached, the market is expected to stabilize.