Chevron – Oil Spikes on OPEC Surprise. How to Play It.
Oil prices shot as much as 5% higher on Thursday as OPEC and its allies agreed to extend most of their production cuts through April, a sign that high prices could be here to stay.
Oil company stocks jumped, too, often much more than the commodity, because prices this high will give many of them operating leverage. Oil producer
Re (ticker: EOG) rose as much as 10% around noon, though it later fell somewhat and was trading about 5.6% higher after 2 p.m.
Because capital costs are high in the industry, oil company margins expand considerably once prices rise above $50 and companies have fully paid for the cost of the equipment and labor they need to extract oil. West Texas Intermediate futures rose as high as $64.77 a barrel just before noon, a new 52-week high.
The Organization of the Petroleum Exporting Countries was expected to start bringing more production back on line next month, given that oil prices have been rising and the economic woes brought on by the pandemic have begun to ease. But the cartel is biding its time, likely because oil production in the U.S. remains subdued — so producers elsewhere aren’t afraid they will lose market share by keeping barrels off the market.
The one change will be that Russia and Kazakhstan are expected to add an additional 150,000 daily barrels to the market, or less than 0.2% of global supply. Saudi Arabia will also extend the 1 million barrels a day of unilateral cuts it started making in February.
“This outcome was not expected and pretty much guarantees a tight market up through the summer,” wrote Oanda analyst
who called it a “shocker.”
“The bullish oil party is not ending anytime soon, and everyone will need to upgrade their end of year oil forecasts,” he added.
So far, oil companies in the U.S. have said that they don’t intend to increase their production much this year, choosing to preserve cash and prepare for more potential turbulence ahead in the oil market.
Truist analyst Neal Dingmann thinks that investors should consider companies whose free cash flow is sensitive to changes in prices. His favorites include
Northern Oil & Gas
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