Our best loved oil and gas stocks could be in for a nasty surprise as the oil price is facing a fresh price crash in 2019 unless oil cartel, OPEC, and friends deepen their production cuts, according to Norwegian energy consultants Rystad Energy.
The market has brushed this doomsday warning aside as the energy sector is the best performing part of our market today with the likes of Woodside Petroleum Limited (ASX: WPL) jumping 1.7% to $29.04, Oil Search Limited (ASX: OSH) rising 1.9% to $7.20 and Santos Ltd (ASX: STO) surging 2.4% to $5 during lunch time trade.
In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) has only managed to inch up 0.3%.
The dire outlook from Rystad, which the Australian Financial Review said was one of the few to correctly forecast US oil production to hit 10 million barrels a day, stems mainly from its take on the US shale oil industry.
Not only are these unconventional oil producers tipped to lift daily production to 11.4 million barrels by the end of this year and to 12.7 million by end of 2019, they can produce oil at lower costs and greater well productivity than many are anticipating.
These so-called marginal producers can expand production even if crude prices fell to between US$40 to US$50 a barrel, claimed Rystad.
The West Texas Intermediate (WTI) oil price has jumped by around 29% over the past year to hit a little over US$62 a barrel thanks in large part to production cuts from OPEC countries.
What has surprised the oil bears is that OPEC has managed to keep member discipline in check with these major oil producing countries keeping to their quotas, and convincing other non-OPEC producers (such as Russia) to tow the same line.
While that is a pretty remarkable feat given OPEC’s poor history of member compliance, it may not be enough to stave off the next oil market crash.
The current production curbs, which will see around 2 million barrels of oil per day taken off the world market by OPEC and friends, are only meant to last till the end of 2018.
Rystad thinks the sharp ramp-up in US shale output will mean the cuts will have to remain in place for longer and may have to be deeper to keep demand and supply in balance.
Given that the direction of the oil market lies in the hands of so many different players with competing interests, it is really anyone’s guess where the oil price will end up over the medium to longer-term.
It might be a good idea for oil stock investors to stand ready to take profit quickly and regularly as the hold-and-forget strategy is unlikely to be a good one to apply for these blue-chips.
Blue-chips aren’t meant to be this unpredictable and volatile! Thankfully many aren’t facing the same challenges as oil producers.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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