Is A Surprise Russia/OPEC Production Cut Looming?
With crude diving into the mid-$20 a barrel range in recent trading, it’s abundantly clear investors are still focused on the global oil glut.
Recent estimates from the International Energy Agency (IEA) suggest the global market was oversupplied by around 2.6 million barrels per day at the end of 2015.
But when you add the new production that’s starting to pour in from Iran, which could eventually be anywhere from 600,000 to 1 million barrels a day, it’s easy to see why crude prices are hanging out near 13 year lows.
Clearly, there’s still plenty of bearish supply news in the oil patch.
But believe it or not, the price of West Texas Intermediate (WTI) actually rallied the past few days…
As you can see, the commodity is up sharply the past few sessions. While it’s likely the upturn is simply due to short sellers collecting profits on their positions, there may be another explanation.
According to multiple media sources, OPEC and Russia are in talks to cut production.
In case you’re unaware, Saudi Arabia, which is the de facto leader of the Middle Eastern oil cartel, has repeatedly said it wouldn’t cut production until non-OPEC producers like Russia do the same.
Of course, the past year and a half downturn in the price of oil is putting immense financial stress on both countries. While Saudi Arabia likely has the resources to withstand an extended oil price downturn, Russia could be near the end of its rope.
In my opinion, Russia is crying uncle in response to cratering crude pricing.
Could a coordinated production cut be coming soon?
It’s tough to say. But there’s no question a substantial cut from two of the world’s largest oil producers would bring bulls stampeding back to the crude market.
With that said, what’s the best way to play the oil industry right now?
For starters, bears are pressing their luck if they feel staying short is the appropriate strategy in crude right now. After all, how low can the world’s most important energy commodity really go?
$15?
$10?
Not likely.
In other words, the downside potential is so minimal at these prices the risk/reward of shorting doesn’t really make sense anymore. At least it doesn’t for me.
That’s why you should start looking for ways to profit from a potential upturn in the price of crude.
Here’s what I have my eye on…
First of all, given the stress in the US shale industry, I’m staying as far away as I can from small- and mid-cap oil producers. There’s simply too much pressure on balance sheets in this area of the market.
For proof, just look at the recent de-listings of oil explorers SandRidge Energy $SD, Penn Virginia $PVA, and Magnum Hunter $MHR. High costs and unsustainable debt put these producers down for the count.
Instead, look to best of breed oil producers like Exxon Mobil $XOM and Chevron $CVX.
Not only will the share price of these oil industry heavyweights rise on an oil price rebound, but you’ll get paid a juicy dividend while you wait for the eventual upturn.
Bottom line…
While it’s hard to say if Russia and OPEC will agree to production cuts, it’s becoming clear the downside is limited in the crude market. As a result, now’s the time for astute investors to start picking up oversold top-tier oil producers.
Until Next Time,
Justin Bennett
BIO: Justin Bennett is the head commodity research analyst at Commoditytradingresearch.com. With over a decade of real world trading experience, he finds ways for you to consistently profit from movements in commodities and the companies producing them. Sign up for our free reports and commodity newsletter at https://commoditytradingresearch.com/free-sign-up.
Category: Commodity Trading, Crude Oil
