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Oil and Gas Investors: Could We See an End to Supply Cuts?

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Oil prices hit four-year highs earlier this year as supply cuts that have been in place for over a year have helped commodity prices finally gain some momentum. It’s taken some time for prices to rise as U.S. production has continued to be very strong and that has offset a lot of the progress OPEC cuts have had on the price of oil.

However, there are talks that we could see those supply cuts come to an end, and that could be very bad news for oil and gas investors. A big reason why oil prices have even gotten to $70 a barrel is because of the output restrictions that OPEC members have agreed to. Without those restrictions, we could see the price of oil tumble back down to below $50, perhaps even crash to under $40.

Production on the rise?

Recently, it was learned that Saudi Arabia’s output for May was increased to more than 10 million barrels per day, which is right around the limit that it had agreed to in the last round of supply cuts. Saudi Arabia and other countries are anxious to start pumping, as it’s been a long time that these cuts have been in place, but the alternative is higher production at a much lower price per barrel.

Big meeting coming up

The next OPEC meeting is scheduled to take place June 22 in Vienna, and investors will want to circle that date as we could learn the fate of supply cuts then. Originally, limits on output were expected to last through to the end of the year, but we’ve also heard rumblings of potential long-term deal that could run 10 or 20 years long. And that’s the problem, a lot of the information is hearsay and we’ll have to wait until the big producers meet in Austria to see if they make any changes to their plans.

In a recent statement, OPEC raised concerns about the uncertainty in the industry, stating that “the re-emergence of global trade barriers, continued growing debt levels and potentially rising volatility in asset markets amid ongoing monetary tightening, are some of the challenges that may negatively impact the 2H18 growth dynamic.” This certainly suggests that a re-evaluation may be in order at the next meeting.

What this means for investors

Some oil and gas stocks have gotten a boost from a stronger commodity price, while others have continued to struggle, particularly in Canada where the political climate has not been conducive for investing. However, if we see oil prices drop, which is likely to happen if there’s going to be a big increase in production among OPEC members, then we could see the bears come back out and a lot of energy stocks could come crashing down.

As the U.S. and other non-OPEC producers continue to ramp up production, that will only make it more difficult for the price of oil to stay this high, especially without supply cuts in place.