As a result, investors should recognize that this surge in oil prices is likely transitory, and that while OPEC+ is able to capitalize on short-term disruptions now, it will not be able to forever.
Listen to On the Minds of Investors
The March 4th OPEC+ meeting passed with more fanfare than is typically associated with the organization’s biannual summit. As is normal, OPEC countries, led by Saudi Arabia, met with key non-member states to discuss output changes. Abnormally, though, the February deep freeze in Texas has temporarily damaged U.S. energy production, resulting in roughly 4 million barrels per day of lost production and a surge in oil prices to levels not seen in 12 months.
In response, analysts had expected OPEC+ to modestly increase production. This in itself was newsworthy, but the decision to not increase production – including, critically, the continuation of Saudi Arabia’s voluntary cut of 1 million barrels per day until at least April – was even more shocking. Oil prices in turn moved higher, leading investors to ask whether this was the beginning of a broader trend.
Clearly, production cuts will help keep oil prices elevated. However, a number of forces may counteract short-term supply issues. To start, the pandemic has illuminated the effectiveness of working-from-home, which could result in fewer commuters on the road and less need for gasoline. Furthermore, demand for air travel remains depressed, and the combination of smaller fleets and an uneasiness about flying with strangers, even after vaccination, could put a strain on jet fuel prices. Finally, while the deep freeze in Texas temporarily disrupted U.S. energy production, it did not change the fact that the U.S. has become the marginal producer in global energy markets (thanks in large part to the shale oil boom of the last several years) and OPEC+ is no longer able to unilaterally affect global supply.
As a result, investors should recognize that this surge in oil prices is likely transitory, and that while OPEC+ is able to capitalize on short-term disruptions now, it will not be able to forever. Moreover, given the structural anchors for oil prices and the growing importance of “green” energy sources, it seems more likely than not that oil prices stay rangebound for many years. At the same time, though, investors should recognize that despite meaningful improvements in oil prices (and better demand prospects as the global economy recovers), the U.S. energy sector has still dramatically underperformed the broader equity market. In an environment where stocks may look expensive and income can be hard to find, the energy sector may be an area of refuge for investors puzzled by the current landscape.
Crude oil prices recover as mobility increases
WTI global spot NYMEX ($bbl), mobility and engagement index (%)