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Why Oil Prices Will Surge in 2017

Crude oil prices and energy stocks are getting a windfall

By Larry Ramer, InvestorPlace Contributor

Oil prices look poised to rise to around $60 to $65 per barrel over the next few months. Production cuts by OPEC and Russia, seasonal factors and accelerating global economic growth should combine to push oil prices higher.

Why Oil Prices Will Surge in 2017
Source: Shutterstock

Moreover, oil is currently trading toward the bottom of the range where it’s been trending for most of the year, and mounting tensions between the U.S. and Iran could easily lead to armed conflict of some sort that would cause a tremendous spike in oil prices.

Considering these factors, investors should increase their exposure to oil immediately and take profits at the end of June, or when prices reach $60-$65 per barrel, whichever comes first.

Energy stocks such as Exxon Mobil Corporation (NYSE:XOM), BP plc (ADR) (NYSE:BP), Chevron Corporation (NYSE:CVX) are also attractive stocks to buy at current levels.

OPEC, Russia Supply Cuts

OPEC and Russia clearly want oil prices to go higher. They have taken concrete steps to achieve that result. Specifically, they have agreed to reduce their oil output and have mostly kept to their commitments.

The fact that the major oil producers want oil prices to rise and are taking action to obtain that result should eventually cause prices to actually increase significantly. Although some have expressed concerns about rising U.S. shale production, the U.S. obviously does not produce anywhere near a majority of the world’s oil.

Global Economic Growth Accelerating

Most of the world’s major economies are heating up. The eurozone’s GDP growth accelerated to 0.5% last quarter and its unemployment rate fell to 9.6%, its lowest level since May 2009. The Bank of Japan raised its 2017 GDP growth forecast to 1.4% from 1%, and India’s economy minister predicted that the country’s GDP would jump 7% in the upcoming fiscal year. Written off for dead by many last year, even China’s economy is showing signs of life, as investments in fixed assets there grew more quickly than expected in the first two months of the year.

Meanwhile, the country’s imports have been strong and the profits of its industrial sector are rising, Reuters reported. And OCBC economists wrote that China’s economic growth could increase to 7% in the first quarter, up from 6.8% during the previous quarter.

In the U.S., employment data was quite strong in February, and “investor and business confidence has soared” since the presidential election, according to Bloomberg. As global economies heat up, they will use more fuel, causing oil demand to increase.

Seasonal Issues

Using a chart of the United States Oil Fund LP (ETF) (NYSEARCA:USO) as a proxy for oil prices, analysis shows that oil prices tend to rise around this time of year.

In 2016, USO rose from $10.48 on March 18 to $11.78 on July 1. In 2015, the energy stock went from $16.43 on March 20 to $19.98 on June 26. In 2015 the stock rose from $35.84 on March 21 to $38.98 on June 27. Considering the higher demand for fuel in most of the world in the spring and summer, this seasonal pattern is logical.

Below the Recent Range and Mounting Tensions

Despite its recent increase, the price of oil is below the $50-$55 range within which it has traded for most of this year. Angry words and shows of force by the U.S. and the Islamic Republic could easily end up leading to some sort of armed conflict between the two countries. Such a conflict, of course, would send oil prices soaring, given Iran’s sizable oil exports and its close proximity to Saudi Arabia and other Gulf states.

Additionally, Iran is located near the the Strait of Hormuz through which a third of the world’s oil flows, and Tehran has previously threatened to close the strait to U.S. ships.

Additionally, last month President Donald Trump wrote that he would not be “kind” to Iran, and his administration placed new sanctions on Tehran, spurring Iran to conduct “extensive military exercises.” In early March, the U.S. navy accused an Iranian ship of “harassing” one of its vessels. Although conflict may not break out between the U.S. and Iran in the next few months, it’s certainly a real possibility.

The aforementioned catalysts, which will likely fuel a rally in oil prices over the next few months, makes oil and energy stocks quite attractive at current levels.

As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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