Oil Doubles, but Upside Could Be Limited

tradestix | March 4, 2021

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We had to see it to believe it.  And now, well… we’ve seen it.

After watching oil struggle at $26.05 a barrel in February 2016 on supply-demand imbalances, oil prices now sit at a high of $52.83.

That’s a gain of 103%.

Needless to say, oil stocks have loved every minute of it.  Exxon Mobil (XOM) rallied from a low of $70 to $92.  That’s a sharp difference from the obliteration its stock witnessed, falling from a high of nearly $95 to $70 in months.

Chevron (CVX) rocketed from lows of $75 to $118.  That’s also a sharp run after watching its stock get clobbered from $120 highs to less than $70 in 2015 as well.

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But that’s the past.

Now there are two questions on every one’s mind.  How much higher can these two oil trades run.  And will the oil rally continue?

Unfortunately, the answer to both will rely on the actions of OPEC and non-OPEC countries.

Will they actually cut what they agreed to cut?  Will they abide by it?

Or will they cheat, as they have historically done?

Here’s what we know to be fact.

OPEC just cut by 1.2 million barrels a day, or roughly 1% of global supply.  That’s a sizable chunk and could keep oil well above $50 for the foreseeable future.

But there’s still a good amount of oil on the market.

And we have to also consider that while non-OPEC countries also promised to cut production by up to 558,000 barrels per day, higher oil prices will bring back more production.

We also have to ask who will enforce it the OPEC and non-OPEC agreements?

After all, it’s been historically tough to ensure that countries stick to what they agreed to do.  In fact, over the last 34+ years and 17 different production-cut agreements, OPEC has only cut an average of 60% of what they promised.

If OPEC and non-OPEC don’t live up to their word, and new production comes online, given higher oil prices, we’re right back to the start with plummeting oil prices.

We can only hope this time will be different… again.  But there’s no guarantee.