Oil prices are staging a comeback, driving Brent crude oil above $70 following an announcement from the kingdom of Saudi Arabia indicating that the world's major crude producers plan to cut supply significantly in 2019. A drop off in crude oil prices in the recent period has weighed on oil and gas companies. Now some market watchers view the development with OPEC as a positive driver for the industry and key players like Chevron (CVX) and Exxon Mobil (XOM), as outlined by Barron's.
Oil Weakness to Reverse Thanks to Saudi Arabia Disproportionate Influence on Pricing
Since reaching a 52-week high at the beginning of October, the crude oil price has fallen 18% through Monday morning, dragging the SPDR S&P Oil & Gas ETF (XOP) down more than 17% over the same period.
Ahead of next month's OPEC meeting, Saudi Arabia said it will slash production by 500,00 barrels, or about 0.5% of current global supply. Barron's Al Root noted that changes in output from the particular world region can have an outsized impact on commodity prices due to the major difference in what it costs to produce oil in the kingdom versus other places in the world. He noted that in 2015 when OPEC lifted its output by about 2 million barrels a day, just over 2% of global demand at the time, oil prices decreased by roughly a third, while oil stocks experienced a simultaneous plunge.
"Don’t be surprised if oil prices to react positively to this weekend’s news. And even if the small Saudi cut doesn’t immediately improve oil pricing, it may signal OPEC’s intention to cut further in December. Officials at this weekend’s meeting fretted about higher supply growth and the need to balance the market in 2019," wrote Barron's.
Global oil supply has increased by 3.3% in 2018, while non-OPEC supply is growing faster and U.S. oil production is up in the double digits.
Root added that commodity prices that are influenced by cartels such as OPEC, which controls nearly a third of global oil production, do not necessarily rise and fall with economic cycles. Given the recent weakness in the energy sector, bulls see a major oil industry revival as possible based on OPEC's actions alone.