Energy

Even If Oil Has Bottomed, Oil Stocks Are Still in for Difficult Times

24/7 Wall St. Staff

Published: March 18, 2016 7:45 am

Last Updated: January 13, 2020 11:47 am

Oil is recovering, and markets are asking what’s in store for the major oil producers. Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX) and ConocoPhillips (NYSE: COP) all suffered as crude declined, as it became less and less profitable to pull barrels out of the ground. With things seemingly turning around, at least near term, common sense suggests we should see a similar turnaround in the fortunes of big oil. Will common sense prevail? Probably not.

Oil is up, yes, but a variety of factors are coalescing to ensure it won’t be up for long — or at least that it won’t rise much further. The primary driver behind the current bullish momentum is the expectation that OPEC will come to an agreement on output caps. This might happen, but continued production at current levels will do very little to dent the current oversupply.

The United States alone has more than 1.2 billion barrels of oil stockpiled, and global production is outstripping demand by 2 million barrels a day. Global daily demand comes in at around 94 million barrels daily. Without the production surplus, U.S. stockpiles stagnate at their current levels. If production falls below demand based on an OPEC freeze agreement, chances are it won’t do so by more than 2 million to 3 million barrels a day. At a 2-million-barrel production shortfall, it would take nearly two years to work through U.S. stockpiles alone.

Obviously this is an extreme example and the United States wouldn’t let its stockpiles reduce considerably, but this only serves to support the point.

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