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Will an Output Boost End Oil's Runaway Rally?

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Stocks ended lower on May 25 as crude prices plummeted. The immediate trigger for a decline in oil prices was reports that OPEC and Russia were discussing an increase in oil production. Consequently, stocks of energy companies suffered losses.

The energy sector has been on a dream run this year following OPEC and other major oil producers’ decision to extend an output controls agreement. Consequently, oil prices touched three-year highs recently. But could a reconsideration of the same agreement end crude’s spectacular rally? 

Oil Prices Suffer Weekly Losses

On May 25, the price of WTI crude declined by 4% or $2.83 to end at $67.88 per barrel. This was the largest daily loss for U.S. crude price since July 2017. Currently, oil is nearly 7% lower than the recent highs above $72. This was also its lowest close since May 1. Further, prices suffered a weekly decline of 4.9%.

Additionally, Brent crude lost 3% or $2.35 to close at $76.44 per barrel. This was its lowest close since May 8. Brent crude also suffered a weekly loss of 2.6%. In recent weeks, a collapse in production in Venezuela and fears that exports from Iran will fall post Trump’s decision to exit the nuclear deal had boosted prices.

Reports of Output Increase Cause Decline

The decline in crude prices weighed on shares of energy companies. Consequently, shares of oil majors Exxon Mobil Corporation (XOM - Free Report) and Chevron Corporation (CVX - Free Report) declined 1.9% and 3.5%, respectively.

Shares of Schlumberger Limited (SLB - Free Report) and ConocoPhillips (COP - Free Report) Inc. also declined 3.7% and 4.4%, respectively. ConocoPhillips has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The immediate trigger for the decline in crude prices was reports that OPEC and key non-OPEC oil producers were considering an increase in output. On May 25, Russia’s energy minister Alexander Novak met his Saudi counterpart Khalid Al-Falih in Petersburg to discuss the output controls agreement.

Subsequently, reports emerged that an increase in production levels was being considered for the first time since 2016. The current agreement, which has been in force since January 2017, aims to limit output to 1.8 million barrels a day.

According to a report from Reuters, the planned increase in output is as high as 1 million barrels. Bloomberg has reported that output may be increased by 300,000 barrels to 800,000 barrels per day. Currently, global inventories are close to OPEC’s targeted level, another factor which has helped to boost prices to three-year highs recently.

Forecasts for Prices Remain High

Another reason for the decline in crude prices on last Friday was an increase in total active U.S. rig count. A report from Baker Hughes (BHGE - Free Report) revealed that the number of active U.S. rigs drilling for oil increased by 15 to 859 over last week. This was the biggest weekly increase since the week ended February 9.

However, despite the losses incurred on Friday Société Générale (SCGLY - Free Report) revised its projections for oil prices upward. The bank now believes Brent crude will maintain an average of $72.75 in 2019, $7.75 higher than its earlier forecast. The outlook for WTI was also revised upward by $6.75 to $67.75.

The primary reason for analysts’ projections for a continuing uptrend is the massive decline in Venezuelan output. Analysts at the Paris-based bank now believe that monthly declines will continue at the current rate into 2019. The projected fall in crude supplies due to the United States’ decision to exit the Iran nuclear deal is also likely to boost prices in the medium term. 

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