On November 12, 2018, we warned that weak Iran sanctions and oversupply would doom oil prices.
Back then, U.S. supply was rising, demand was weakening and there was a gloomy world economic outlook. U.S. foreign policy toward Iran further complicated matters.
After talking tough for nine months about cutting off the flow of oil from Iran, the U.S. backed down.
As Scott Nations, the president and chief information officer of fund manager NationsShares, said: “The sanctions against Iran are more like suggestions now.”
Oil Prices Begin to Climb in 2019
Check out my video below to hear about recent news from the oil space.
Here’s what happened to the oil price:
A Bounce From December Lows
At the end of that article, we warned that oil prices would turn in 2019:
In the last 12 months, Venezuela’s oil production fell by 600,000 barrels per day. It sits at 1.2 million barrels per day right now. But the decline continues.
At the same time, global oil demand continues to climb. According to the Energy Intelligence Group, oil demand grew by 2.1 million barrels per day in 2018.
That means supply must keep up. And up until now, it has. But looking forward, we see a far grimmer picture.
Today, Iran has about 1.5 million barrels per day in exports.
The waivers expire in 180 days. There is uncertainty in how much oil will be shut in from Iran. This will become a slow cinching off Iran exports over the next six to 12 months.
Oil supply will eventually fall behind. That means we are close to the low point in oil prices for the next year.
A Way to Profit From Oil’s Price Increase
Now we have less than a week to go, and the U.S. is talking tough again. Oil prices rose from $42.50 per barrel to nearly $66 per barrel today. That’s a 55% increase in four months.
And the oil market is much tighter than before. Here are some changes from just four months ago:
- Venezuela’s crude oil production fell from 1.2 million barrels per day in November 2018 to 890,000 barrels per day today — down 26% in four months.
- According to Energy Intelligence data, global oil demand declined 11%, from 101.9 million barrels per day to 91 million barrels per day.
- OPEC’s crude oil production fell 8%, from 33.1 million barrels per day to 30.3 million barrels per day.
- Iran’s crude exports rose from 1.1 million barrels per day in November 2018 to 1.3 million barrels per day today. Sanctions could cut all that off the market.
- Global sentiment is much more bullish on oil today. The fear of Iranian retaliation in the region has investors worried — Iran threatened to close the Strait of Hormuz (which is a major oil shipping transit point).
The oil market is far different today than it was just four months ago.
However, oil stocks haven’t benefited as much as we would expect. The SPDR Oil & Gas Exploration and Production exchange-traded fund (NYSE: XOP) is up 33% from its low in December 2018 — well below the 55% gains in the oil price.
That looks like an opportunity to me. These higher oil prices will show up in the second-quarter earnings reports.
And for many oil companies, the extra oil price will go straight to the earnings line. I expect to see oil companies’ shares rise steadily over the next few months.
It looks like a great time to be long oil companies.
Good investing,
Matt Badiali,
Editor, Real Wealth Strategist
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