OPEC delivered a very substantial production cut on Wednesday in Vienna, and first, I need to take a victory lap: – I was one of the very few (I believe Francisco Blanch of BofA was the only other), who predicted that OPEC would be successful. In my last oilprice premium column, I also gave two stocks to buy to play the meeting, Noble Energy (NBL) and Oasis Resources (OAS), which were up 11% and 28% on Wednesday. I'd call those two pretty good trades.
No time to stand on your laurels – everyone wants to know where I think oil prices and oil stocks to go from here. Here are my thoughts:
I had expected the agreement to come out of Vienna to be substantial, and it was: I assumed that Saudi Arabia would “go it alone” for the full brunt of the necessary 1.2-1.5m barrel a day cut if they had to, but they got a whole lot more from both other OPEC and non-OPEC producers. Despite pessimistic posturing from both Iran and Iraq about being unwilling to accept any limitations, the only complete exemption in Vienna was given to Indonesia. For the Iranians, a full 6 month freeze was agreed to - and using less advantageous independent production numbers. Iraq agreed in essence to similar terms. This marks tremendous concessions by the Shiite members in OPEC, halting below both of their 'golden' production goals of 4m b/d for Iran and 5m b/d for Iraq.
It was a stunning achievement for the Saudis. The OPEC cartel proved it was prematurely thrown into the dustbin of history by most other oil analysts, but instead is again at the forefront of global oil price control.
If there's one thing I've learned through more than 30 years of oil trading, it's that if the Saudis say it, you'd better believe it.
The agreement will have a fast effect on global supply/demand rebalancing. Have a look at this chart from Georgi Kantchev of the Wall Street Journal:
Even with moderate compliance, the cut in global supply will, by the end of the 2nd quarter of 2017, drop global stockpiles back towards the 55-60 day coverage more in line with markets that saw oil prices above $100.
I'm not saying prices are headed back to $100 or U.S. producers won't respond – and the likelihood and extent of that response in terms of ramping production as prices creep higher is very important to understand, and something I'll save for my next full column.
For today, you need to know what to do, particularly with the stocks you already have.
First, I expect this oil rally to sustain itself into the end of the year – slowly, but certainly steadily. I expect to end 2016 between $52-58 a barrel, with opportunistic buying to appear below $48 a barrel instead of below $42, before this agreement.
For stocks I have recommended in the past to take advantage of this rising price, I have these recommendations: Oasis has reacted precisely as we expected with its enormous beta, and has perhaps another day or two of euphoria in it. But we should take quick profits – that's how the trade was thought out. After buying it around $12, I'll push it out as a great trade near to $17. As for Noble, their recent $2B deal with the largest power company in Israel continues to help their Leviathan project, making it easier to look closer at their underrated Niobrara shale acreage. If you bought it around $34 as I suggested, you're already up $4 a share. Now, I say you should put it away as a longer term play. And, if you've previously followed me with Permian plays like Cimarex (XEC) or the Centennial assets (CDEV) you got by the Silver Run Acquisitions (SRAQU) buy, don't even look at them – they're going to stay as core holdings.
Have a great weekend – it's been a very good week.