Crude Oil

We are almost at the last leg of 2016, a year that was marked by unprecedented energy market volatility.

The Story So Far

The year started on a disappointing note with crude prices falling to a 12-year low of $26.21 a barrel in Feb as investors worried about the oversupplied market. The commodity’s collapse threatened the industry’s creditworthiness by hurting cash flows, drying up liquidity and pummeling producer profit margins.

However, indications that supply was easing helped oil prices rebound to $50/barrel mark in early Jun. The surge was driven by outages in Nigeria, Libya, Venezuela and Canada – countries that hold some of the world’s major sources of crude. The upward pressure in oil prices also reflected the U.S. Energy Department’s inventory releases that showed crude stockpile builds turning into draws. Things were further helped by a continued decline in U.S. crude production.

With factors like Canadian wildfires, Nigerian outages/disruptions, production issues in Venezuela and a strike by Kuwaiti oil workers vanishing from the market, oil slipped back under $40 in the first week of Aug. A glut of refined products also kept the commodity under pressure.

The volatility in oil prices continued with the benchmark touching the $50 threshold again early Oct, buoyed by government figures that continued to show large drawdowns, while investors betted on commitments by Organization of Petroleum Exporting Countries (or OPEC) and non-OPEC players to slash production targets.

When divisions in the cartel became apparent and the future of the ambitious OPEC announcement looked more and more uncertain, the commodity fell back under $45 only to receive a booster shot.

The OPEC Deal

In a bold but not unexpected move, the OPEC cartel agreed on Nov 30 to reduce production starting next month. Seen as a desperate bid to put a floor on falling oil prices, the group – led by Saudi Arabia – promised to take 1.2 million barrels a day out of the market.

OPEC’s decision to cut oil production was not totally surprising though the magnitude of reduction were deeper than many analysts had expected. The move aims to trim output to 32.5 million barrels per day — at the low end of a preliminary agreement struck in September.

Russia, which is not part of the body that pumps a third of the world’s oil, will also join output cuts for the first time in 15 years. The biggest supplier outside the bloc relented from its longstanding position of only freezing production and agreed to cut 300,000 barrels from its record high output of more than 10 million barrels a day.

Oil Prices & Stocks Surge

The OPEC deal had a massive impact on the energy markets, sending crude prices back above $50 a barrel. While the entire sector is roaring higher since the announcement, the independent oil explorers and producers – whose revenues are directly associated with crude price – have been among the best performing stocks. In fact, shares of oil finders like Whiting Petroleum Corp. (WLL), Oasis Petroleum Inc. (OAS) and Marathon Oil Corp. (MRO) have exploded higher and climbed to new multi-month highs.