The S&P/ASX 200 Index (Index:^AXJO) is likely to start the trading week on a backfoot, but there's one sector that could outperform.
This sector is the ASX energy stock, which could find solace from the historic oil price agreement ended the bitter price war between Saudi Arabia and Russia.
The positive sentiment is likely to be absent from the broader market as investors take profit from the 18% market bounce from last month's trough.
But all eyes will be on energy heavyweights like the Woodside Petroleum Limited (ASX: WPL) share price, the Santos Ltd (ASX: STO) share price and Oil Search Limited (ASX: OSH) share price.
Can production cuts trigger a bull market?
Tuesday morning will be the first opportunity for the market to cast its judgement on whether the oil bear market is coming to an end.
Oil bulls believe we have reached a turning point. OPEC and other major oil producing nations agreed to slash production by 9.7 million barrels a day from May. While the cuts are meant to last two years, the production restrictions will be gradually eased over the period.
The news sent the WTI and Brent crude prices jumping by around 2%. The WTI benchmark hit US$23.39 a barrel while Brent finished at US$32.11 a barrel.
Oil on slippery slope
Oil prices plunged since the onset of the coronavirus pandemic. Demand took a beating after airlines grounded their fleet while the number of cars on the road plummeted due to the lockdown.
Adding to the pressure was the dispute between Saudi Arabia and Russia. The latter initially refused to curb output, which prompted the Saudis to flood the market with oil to bring Russia back to the negotiating table.
The excess supply and falling demand prompted some experts to warn that the oil price could tumble under US$20 a barrel – and for a while, that prediction seemed to be inevitable.
Oil bears strike back
But it may be too early to call time on the oil slump. The deal between OPEC and its frenemies (better known as OPEC+) may lift the negative sentiment but it probably won't change fundamentals.
For one, the production cut is too small to shift the balance as the drop in demand is estimated by Goldman Sachs to average 19 million barrels a day.
This means the problem of finding storage for the excess production will remain. Finding places to put excess crude is a big reason why some are betting against the oil market, as I've written about here.
Further, OPEC's credibility has taken a hit. The latest deal wouldn't have been possible without US President Donald Trump's intervention. The end of the oil price war is a big political victory for Trump.
However, it shines an uncomfortable spotlight on the fractious relationships within OPEC+. Investors will be right to question if the bloc can work together the next time the oil market gets battered.
