Oil prices have gone a long way in a very short time, which begs the question: Is now a good time to buy oil-related assets?
Since November 29, a day before OPEC agreed to cut production for the first time in eight years — along with Russia and some smaller non-OPEC producers — crude oil prices in the U.S. have surged 15% to just under $52 a barrel.
(Related on ThinkAdvisor: Oil Climbs to 17-Month High on Saudi Pledge, Non-OPEC Output Cut)
Some analysts expect prices are heading toward $60 a barrel so long as the OPEC/Non-OPEC pact, which reduces supply by a total of 1.8 million barrels a day starting in 2017, holds.
“Oil prices will rise,” says Fadel Gheit, managing director and senior analyst, oil and gas, at Oppenheimer & Co. Inc. “The question is when and to what level. “If a lot of OPEC members abide by production caps it could come sooner than many expect; if not, it will take longer. The new normal is around $60 a barrel.”
Bill O’Neill, a founding partner of LOGIC Advisors, a commodities research firm, is skeptical. “Historically when we have these kinds of agreements, producers usually do half of what they agreed to.“ Also, says O’Neill, “supplies still seem quite substantial.”
Goldman Sachs analysts, who view the OPEC and non-OPEC pact as “noteworthy” also expect that the production cuts will be about half of what was agreed on—just one million barrels a day—and have set a price target of $55 a barrel for benchmark U.S. West Texas Intermediate crude oil in the first half of 2017. At that price U.S. producers will increase output by 800,000 barrels a day in 2017, pushing prices even lower, to $50 a barrel in the second half of next year, according to Goldman analysts.
O’Neill is forecasting prices between $45 and $55 a barrel, noting that “U.S. rig counts are already rising week after week.”
Given these various scenarios for future oil prices, what should investors do now?
“Look where we are now and where you think oil prices will be and that will give you a hint where you think oil stock prices are going,” says Gheit. “It’s not the level of the oil price that matters to a stock’s performance. It’s the direction of the oil prices. Going from $40 to $50 a barrels is better than going from $80 to $60 a barrel.”
For O’Neill who’s forecasting that prices are more likely to fall than rise substantially from here, the recommendation is to do nothing other than “neutral market strategies,” using options.