The demand for oil is at a nightmarish level. The lack of travel, the signifcant omission of cars in a stay at home economy, and the Russia-Saudia Arabia oil war are causing the oil crisis. The first two problems stem from COVID-19, which should dissipate. However, Russia- Saudi Arabi, and OPEC hold the future direction of oil in the palms of their hands. Thus, investors must be on the same page when it comes to Russia-Saudi Arabia developments.
Also, to add insult to injury, suppliers continue to produce oil even while demand is still considerably low. Mainly because if oil companies stop producing oil, then bankruptcy and shutdown alarms start ringing. Consequently, the oil industry is suffering from supply and demand shocks.
On one side, you have COVID-19 controlling the demand for oil. Then on the other side, you have Russia-Saudi Arabia and OPEC dictating the supply of oil.
Why did OPEC – Russia extend oil cuts?
The insurgence in oil demand is creating hope for the market. The aspiration to stabilise the oil market saw OPEC, and Russia delay the supply cuts until July. Russia, Saudi Arabia and other OPEC members agreed to cut oil by 9.7 million barrels per day in July.
The decision to delay cuts is wise for now. Because confidence in the oil market is what people need. However, the decision to delay cuts could create a range of unwanted problems. First, as demand grows suppliers, especially shale oil suppliers in the US, could ramp up production. Considering the US is the opposition to Saudi Arabia and Russia, an increase in US production could trigger a ridiculous increase in Russia and Saudi Arabia’s oil supply.
Second, a global recession is inching further by the minute. Any week now, we could see investor confidence fall off a cliff. The threat of a recession is causing OPEC to factor in further contractions in oil demand during 2020. Also, a global recession would trigger mass unemployment and restructuring of the oil industry. Ultimately, threatening the survival of smaller oil companies. A recession could cause another demand shock. Especially, as unemployed people stay at home, confidence in the economy plummets, and the pool of discretionary income for travel shrinks.
What does the extension mean for oil stocks?
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
On face value, oil stockholders would be extremely bullish. Especially those that bought in on March the 21st- negative oil day. Why? Because the delay in historic oil cuts should see demand rise, and thus the price of oil stocks will climb higher. Therefore short term oil investors should see green in their portfolios for the coming weeks. (opinion not advice).
However, the temporary rise in oil prices is just that temporary. The demand and supply for oil should soon run into another brick wall. Whether that be a global recession or a possible re-ignition of tensions between major oil countries. OPEC’s expectations of further contractions in the demand for oil should signal warnings to oil investors.
Overall, if I were a short term-investor, I would ride the wave over the next few weeks and cash in on a nice capital gain. (opinion not advice). Mainly because investing in a market with an uncertain future outlook is not necessarily a wise investment decision. If I were a long-term investor I would hold and become an aggressive buyer when the oil industry takes another hit.
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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Senior Manager of YIG.