The energy sector witnessed a black-letter day on Black Friday, with oil prices recording lowest levels in more than a year, as a result of which, shares of various leading oil and gas firms hit a 52-week low on Nov 23. Notably, WTI crude prices tumbled 7.7% to $50.42 per barrel, marking the lowest settlement since October 2017. In fact, this marked the biggest one-day drop since July 2015. After touching multi-year highs of more than $76 a barrel in early October, the commodity plunged more than 33% on fears of oversupply and economic headwinds, which may in turn dampen demand.
Oversupply Concerns Amid Pipeline Pinch & Low Demand
Per the latest release of Energy Information Administration (EIA), weekly crude inventories data recorded a ninth straight increase, with stockpiles surging to 4.9 million barrels. Record level of production from the prolific shale plays of the United States, even amid pipeline constraints, have been raising concerns. In fact, United States is projected to produce 12 thousand barrels per day (MBPD) by 2019. Expansionary pipeline projects, which are expected to come online by 2019 and 2020, are further weighing on oil prices.
Making matters worse, demand from non-OECD countries is estimated to fall 165 MBPD next year. Growth in oil demand from OECD countries is also expected to decline. In its latest report, the OPEC cut its oil demand expectation for next year for the fourth month in a row. The organization now projects demand to increase 1.29 million barrels a day in 2019, down 70,000 barrels a day from last month's projection.
U.S. Waivers and Strong Dollars
The decision by the United States to offer waivers to some of Iran’s biggest buyers has also played significant part in the price slump. With eight countries (including China, India Italy, Greece, Japan, South Korea, Taiwan and Turkey) receiving waivers from the United Sates to import oil, the move does not appear in sync with the nation’s aim to cut off Iranian exports and further raises concerns of oversupply. Further, as dollar is embarking on its own rally, it is spelling trouble for oil prices.
Trump Playing the 'Khashoggi Murder' Trump Card
U.S. President Trump is certainly playing the game of oil and politics quite well. Trump is supporting Saudi Arabia Crown Prince, Mohammed bin Salman, dismissing CIA’s findings that the latter is linked to Jamal Khashoggi’s murder. Brushing aside the intelligence agency’s reports, Trump views Saudi Arabia as a valuable ally and supports the Crown Prince, who in exchange is keeping Trump satisfied by pumping more oil, which is translating to a drop in oil prices. Notably, the country’s oil output in November has surged to around 11.1-11.3 million barrels a day, witnessing an all-time high. Through his tweets, Trump has been thanking the Saudis for declining oil prices and urging to reduce prices further. Increasing output from Saudi Arabia certainly added to the oil market jitters.
Stocks Plunge to 52-Week Lows
Notably, various notable energy companies including Halliburton (HAL - Free Report) , Phillips 66 (PSX - Free Report) , Schlumberger (SLB - Free Report) , Valero Energy (VLO - Free Report) , Shell (RDS.A - Free Report) Canadian Natural Resources (CNQ - Free Report) , Core Laboratories (CLB - Free Report) , Diamond Offshore Drilling, Baker Hughes, a GE Company, among a few others, hit their 52 week lows on Friday. While Phillips 66 sports a Zacks Rank #2 (Buy), the other companies either carry a Zacks Rank #3 (Hold), #4 (Sell) or #5 (Strong Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
All eyes are now on the oil cartel, which is due to meet on Dec 6 in Vienna. The countries involved in the meeting might introduce a set of production cuts. If that be the case, this may lead to a rebound in prices next year. However, increasing pressure from Trump to avoid curbing production may push the prices lower. It has become a wait-and-watch game now, with market participants trying to weigh whether Saudi Arabia will decide to reward the United States' support on the Khashoggi crisis.
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