Why the share prices of oil stocks may have more room to climb through 2018

The oil sector is among the best performers on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) as the price of crude jumped by over 1% as US President Donald Trump seems to be losing sway with the Organization of the Petroleum Exporting Countries (OPEC).

The share price of Oil Search Limited (ASX: OSH) jumped 1.2% to $8.71 in morning trade as Woodside Petroleum Limited (ASX: WPL) and Santos Ltd (ASX: STO) added around 0.3% when the top 200 stock benchmark fell 0.3% into the red.

There had been concerns that the oil price could come under pressure when OPEC members met over the weekend in Algiers for their quarterly meeting to set production quotas.

The market was surprised that OPEC didn’t do more to bring down oil prices to appease Trump, who has been jawboning the oil cartel to increase the supply of crude quickly.

But Bloomberg reported that OPEC, led by the world’s largest oil producer Saudi Arabia, only gave a lukewarm response as the organisation said that it will only boost supply if customers demanded it – and right now they don’t.

That response is in sharp contrast to Saudi Arabia’s response earlier this year as the oil kingdom seemed to go out of its way to accommodate Trump and preserve its good relations with the US.

The latest response could mark a change even as OPEC and friends are sticking to their earlier commitment to pump an extra one million barrels a day to make up for the shortfall from the collapsed Venezuelan economy and renewed US sanctions against Iran.

But the step-up to the one million extra barrels mark will be gradual as OPEC and Russia are probably right to be nervous about flooding the market with the commodity.

The Trump trade war with China is likely to curtail global economic growth (oil demand and economic growth are positively correlated) at a time when global oil inventories are rising.

It is also believed that Saudi Arabia wants to keep the Brent oil price between US$70 and US$80 a barrel and it’s currently trading at US$79.71 a barrel. There’s no urgency for the Saudis to act.

What this means is that oil stocks will probably stay on the front foot right through to the end of calendar 2018 when OPEC meets again in December.

Experts are also openly questioning whether Saudi Arabia has the ability to lift production much more. The country is seen as the key ballast in balancing demand and supply as it pumps around 10.5 million barrels of crude a day and has said before it stands ready to increase this to 11 million.

Any doubts about its ability, or willingness, to add to supply will be a bullish signal to the energy sector.

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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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