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Oil still has room to grow

Oil closed up 17% today, on news that Russia and Saudi Arabia had agreed to cut 15 million barrels of oil a day between them. However, it increasingly looks like the president may have exaggerated how expansive the production cuts will really be. Saudi Arabia, after close, called for an emergency meeting of OPEC (Oil Producing and Exporting Countries) , to probably cut oil production further. However, the next linchpin in oil prices will be a return in demand. Even with this 17% increase in oil, it is still a fantastic time to buy. Oil is so depressed that it should return 60 – 70 percent over the next year or so. The drop in demand is not permanent and prices will rebound after Covid.

Even with this small rebound in oil prices, highly leveraged oil companies will not benefit. Occidental moved in tandem with oil prices, yet still will not benefit from them. There negative profit margin when oil was price 40% higher than it is now, means they are still not operating in the green. Without a quick turnaround in demand, which will not happen, Occidental will need to file for bankruptcy to survive. The capital markets are not kind to oil currently and highly leveraged companies, like Occidental, do not have enough room to operate within it.

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