Will We Finally See OPEC Cut Production?

Companies such as Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) and Canadian Natural Resources Limited (TSX:CNQ)(NYSE:CNQ) would benefit tremendously from an OPEC deal.

| More on:
The Motley Fool

Oil prices rose sharply on Tuesday and were driven mainly by hopes of a new OPEC supply deal. Of course, this news was also positive for Canada’s energy stocks. For example, Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) and Canadian Natural Resources Limited (TSX:CNQ)(NYSE:CNQ) saw their shares rally by as much as 6.0% and 6.4%, respectively.

So is there anything to this story? Is there any hope of an OPEC deal? Or is this just another mirage in the desert?

Why there is some optimism

While speaking at a conference in London, OPEC Secretary General Abdullah al-Badri said “Tough times requires tough choices … It is crucial that all major producers sit down and come up with a solution.”

Meanwhile, Leonid Fedun, the vice president of Russian energy giant Lukoil, called on the Russian government to make a deal with OPEC nations. If the Kremlin agrees, it would mark a major shift in policy and would be very positive for oil prices.

There are other reasons to be optimistic. For starters, there are an extreme number of short bets on oil, so if sentiment shifts (or there is an OPEC deal), then we could easily see a short squeeze. Furthermore, low oil prices are resulting in a lack of investment, which may cause shortages in the long term.

Don’t get your hopes up too fast

There are a bunch of reasons why an OPEC deal will never happen. First of all, there are too many countries that refuse to cut production, including Iran, another OPEC member. Russia has also refused, partly because its oil companies are privately owned, meaning the Kremlin can’t negotiate with OPEC on their behalf.

Of course, if there ever were an agreement, it would benefit the American shale oil producers more than anyone else. And that wouldn’t sit well with countries like Russia and Iran, both of which have a confrontational relationship with the United States.

A short squeeze is much more realistic and could easily propel oil to US$40 very quickly. In fact, just last week we saw a big rally in oil caused partly by a short squeeze. But here’s the problem: American shale oil producers have been very effectively cutting costs and for that reason could easily ramp up their drilling efforts once signs of a pullback emerge. That is what we saw last year during a couple of very brief oil rallies.

Making matters worse, there are some big questions on the demand side, and there’s still a massive amount of oil in inventory. All of a sudden, Crescent Point and Canadian Natural Resources don’t look so attractive anymore.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

More on Energy Stocks

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

Brookfield Renewable vs. NextEra Energy: Which Clean Energy Stock Is a Better Buy?

Clean energy giants such as NextEra Energy and Brookfield Renewable are top long-term investment options in 2024.

Read more »

Gas pipelines
Energy Stocks

Buy, Sell, or Hold Enbridge Stock

Are you considering Enbridge (TSX:ENB)? Enbridge stock is a popular holding, but not all investors agree on whether you should…

Read more »

Burning gas and electric cooker rings
Energy Stocks

With Natural Gas in Demand, 2 TSX Stocks Are Set to Heat Up

Natural gas stocks such as Tourmaline will see their fortunes rise as natural gas demand and prices rise.

Read more »

Gas pipelines
Stocks for Beginners

3 Reasons to Buy Enbridge Stock Like There’s No Tomorrow

Enbridge (TSX:ENB) is a superb long-term option. Here's why you should buy Enbridge stock right now and hold it for…

Read more »

potted green plant grows up in arrow shape
Energy Stocks

1 Ridiculously Undervalued Growth Stock Down 40% to Buy Hand Over Fist

Don’t miss your chance to load up on this high-yielding, renewable energy growth stock.

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

1 Renewable Energy Stock to Buy and Hold

Here's why Brookfield Renewable (TSX:BEP.UN) is a top renewable energy stock long-term investors should consider.

Read more »

financial freedom sign
Energy Stocks

Could Investing $10,000 in Enbridge Make You a Millionaire?

A top-tier dividend stock can help you accumulate wealth or become a millionaire over time.

Read more »

Aerial view of a wind farm
Energy Stocks

Brookfield Renewable Stock Climbs Higher: Time to Buy?

Brookfield Renewable stock (TSX:BEP.UN) continues to climb, but remains below the $40 mark. But that share price looks in view.

Read more »