What happened
Shares of all the major oil stocks are rocketing in afternoon trading Tuesday on news that Saudi Arabia and the Russian Federation have reached a compromise on oil production levels.
In 1:30 p.m. EST trading, ExxonMobil (NYSE:XOM) stock is up 7.5%, followed by ConocoPhillips (NYSE:COP) with a 6.8% gain, and Chevron (NYSE:CVX) is up 5.2%.
IMAGE SOURCE: GETTY IMAGES.
So what
In December, OPEC and a group of oil-producing nations led by Russia agreed to permit an increase in production of 500,000 barrels per day, relenting on oil cutbacks instituted earlier in the pandemic that reduced production by first 9.7 million barrels per day (bpd), then only 7.7 million bpd. But as The Wall Street Journal just reported, the Saudis and Russians have agreed that January oil production levels (7.2 million bpd) will continue through February unchanged.
No increase in output is now expected before March at the earliest.
Economics 101 teaches us that, given constant demand, limiting supply will push prices of any commodity up, and this is exactly what we're seeing today. OilPrice.com shows Brent crude prices up 5% at nearly $54 a barrel and WTI crude up 5.2% -- and now above the $50-a-barrel mark.
Now what
Both of these developments are obviously good news for companies that sell oil -- companies like Exxon, Conoco, and Chevron. Investors should be aware, however, that the reprieve may be temporary.
As vaccines roll out and economies improve, demand for oil will likely grow, encouraging oil producers to sell more of it as they battle for market share. And despite the decision not to increase production in February, plans remain in place "to restore a total of 2 million barrels a day of output in the coming months," reports the Journal.
Today's news gives energy investors hope that the expanded group of oil-producing nations known as OPEC Plus can work together to establish reasonable production levels that will both secure supply and keep prices high enough to ensure reasonable profits. It doesn't mean, however, that they will continue to do so in future months.
