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Only Crisis Or Cuts Will Move Oil Markets

Despite bullish noises from OPEC…

Zainab Calcuttawala

Zainab Calcuttawala

Zainab Calcuttawala is an American journalist based in Morocco. She completed her undergraduate coursework at the University of Texas at Austin (Hook’em) and reports on…

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Oil & Gas Stocks Soar On OPEC Deal – Can The Rally Continue?

Bakken

The markets are reacting to the Organization of Petroleum Exporting Countries’ (OPEC) planned production reduction not just in oil price spikes, but stock prices, too—giving the deal the power to heal the oil and gas sector in a way that speculative chatter on hopeful output declines has not been able to over the past two years.

Investors who had laid the groundwork to profit off a green-light scenario for bloc-wide production cuts saw a huge payout last Wednesday. Even energy production and exploration companies such as California Resources—with an abysmal credit rating of Caa2—saw a 50 percent increase in share prices.

As Market Watch reported last week, of the 36 energy stocks included in the S&P 500 Index, 16 saw a share value increase of at least 10 percent after OPEC announced its landmark deal—the first to limit production since 2008.

Thirteen of the companies that experienced the OPEC-bump specialize in oil and gas production, showing that the 32.5-million-barrel limit has triggered the shift in supply-side market fundamentals needed to lure new investments into the oil and gas industry.

Some of the biggest winners by share price were Marathon Oil Corp., Transocean Ltd., Newfield Exploration Co., Murphy Oil Corp., Anadarko Petroleum Corp., and Devon Energy Corp—who all saw a hike of 15% or more from closing on November 29 to closing on November 30, after the deal was reached.

Other big gainers in the oil and gas industry ere Hess Corp, Concho Resources Inc., Helmerich & Payne Inc, Cimarex Energy co, Halliburton Co, and EOG Resources, which all saw gains of more than 10%.

The good news comes just as data from Bloomberg’s World Oil and Gas Index confirms that a group 58 prominent oil and gas firms has added $490 billion to their market share in 2016, following two years of account-shattering losses: $720 billion in 2014 and $850 billion in 2015. Related: Oil’s Most Popular Trading Products May Soon Be Shut Down

This year’s wave of oil and gas investments has fed the return of the American drilling sector, which has seen six months of solid growth even as noise from OPEC’s messy freeze discussions caused oil prices to face unrelenting volatility.

Even though the deal has not caused barrel prices to jump to $60 levels as predicted by Phil Flynn of the Price Futures Group, it looks like the stock gains are here for the short-term, if not the long as well.

The effects of day trading have caused stock prices for the industry’s biggest stars to fluctuate up and down a couple of percentage points over the past week, but the 10-20 percent hikes in valuation have remained largely in tact, thanks to the near absence of unruly protest statements by OPEC oil ministers jockeying for position.

OPEC members Iran and Saudi Arabia, arguably the fiercest archrivals in the Middle East, each embraced the deal as a step forward as part of their larger economic goals. A 3.79 million-barrel cap for Iran gives it the flexibility to continue its recovery after six years of international sanctions that crippled its main governmental revenue source: oil.

Members of the Iranian parliament signed a letter on Monday declaring the OPEC deal a national diplomatic victory.

"It was a difficult task for the Iranian officials [in Vienna] to persuade OPEC members to agree with the increase in the Iranian oil production rate," the letter read.

But by Tuesday, Iran’s tone had changed, issuing new statements that spoke of Iran’s ability to sell as much oil as it wants and to any country it “deems appropriate”, the oil ministry’s news service Shana quoted Iranian President Hassan Rouhani. Related: How Russia Outsmarted OPEC

Saudi Arabia hopes that high and stable prices will ensure that the coming initial public offering (IPO) of the Saudi Arabian Oil Co. will generate the revenues that the KSA needs to plug untenable budget holes.

“Even $60 oil isn’t enough to solve all the country’s fiscal issues," Apostolos Bantis, a credit analyst at Commerzbank AG in Dubai, said in an interview with The Economic Times. “It’s more a question of building confidence in the economy. If crude stabilizes at higher prices, that will give more certainty and provide a stronger basis for the Aramco IPO.’’

This reality has likely tempered Saudi rhetoric following the OPEC deal. If—and this is a big if—OPEC is successful in keeping its official mouthpieces in check until January when the cuts start, and if they can keep all members as of January producing under the cap as promised, oil and gas stocks may continue to see upward trends.

By Zainab Calcuttawala for Oilprice.com

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