Kuwait Backs the Production Freeze: What Does It Mean?
Supply glut and production cap
Until 4Q15, the global crude oil market was oversupplied by 2.23 MMbpd (million barrels per day). OPEC’s (Organization of the Petroleum Exporting Countries) supply stood at 31.7 MMbpd in January 2016—the same as the levels in December 2015. If the production freeze talk succeeds, would take at least one year to adjust the demand with the supply. The EIA’s (U.S. Energy Information Administration) forecast estimates 1.1 MMbpd growth in demand in 2016 and 1.2 MMbpd growth in demand in 2017. The data clearly outline that while the production freeze talk was primarily responsible for the rally in crude oil prices in the last two months, it still needs time to end the glut supply situation in the crude market. The following graph shows the EIA’s projection for 2016 and 2017.
Stocks highly correlated with crude oil in the last two months
Abraxas Petroleum (AXAS) has the highest positive correlation with West Texas Intermediate crude oil among the upstream companies that are part of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) between February 11, 2016, and April 4, 2016. On February 11, US (IVV)(QQQ) crude oil (USO) made multiyear lows and started to recover from this price level. Other upstream stock such as Cobalt International Energy (CIE), Matador Resources (MTDR), and Apache (APA) also have a high correlation with crude oil. Read Key Upstream Stocks Could Be Impacted by Crude’s Downturn to learn more.
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