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Why Energy Investors Shouldn’t Panic about Recent Weakness in Oil Prices

By Elliott H. Gue on May. 29, 2018

We believe the recent rally in energy stocks and master limited partnerships (MLP) is the beginning of a major cyclical upturn for energy and commodity prices that will likely last for some time much as 1999 marked the early stages of the last cycle. While these comments may seem “long term” in nature, if history is any guide, a major new commodity up-cycle will present significant opportunities.

From a shorter-term perspective, oil prices are down sharply over the past few days due primarily to comments out of Russia and Saudi Arabia that the OPEC-Plus group is likely to look to raise output at its semi-annual meeting next month (June 20-21 in Vienna). There appear to be three major reasons OPEC-Plus is considering a boost to its output.

First, there are ongoing concerns about the potential impact to global oil demand resulting from surging oil prices. While much of the market’s focus over the past four years has been on the glut in supply, it’s worth noting that above-average demand growth has been a major factor in the gradual rebalancing of supply and demand since early 2016.

Over just the past 10 days, President Trump, the International Energy Agency (IEA) and India have all voiced concerns about rising oil prices and the impact on demand in key consuming nations.

Second, OPEC-Plus is facing significant “involuntary” supply cuts including Venezuela, Angola, Mexico and, more recently, Iran. The result is that OPEC’s actual production cuts are far larger (about 50% more) than those agreed at their November 2016 meeting.

And third, Russian producers have plans to expand their capacity by 1 million bbl/day or more over the next 3 to 4 years and are likely anxious to begin boosting their output.  As a result, Russian Energy Minister Alexander Novak appears to be pushing for a larger and/or faster recovery in OPEC-Plus output than Saudi Arabia’s Khalid al-Falih.

However, it’s important to put the recent decline in oil prices and energy stocks into perspective.

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