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How to Trade the Oil Rally: 3 Stocks, 3 ETFs

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After being hurt by Hurricane Harvey, positive sentiments have started building up in the oil space with a wave of positive news. Notably, U.S. crude is trading below $50.00 per barrel while Brent oil is hovering around $55.00 per barrel.

Improving Trends

The historic output cut deal wherein OPEC, which accounts for one-third of the global output, Russia and other producers agreed to curb production by 1.8 million barrels per day until next March, is now paying off. This is especially true as OPEC oil output declined in August for the first time since March. The 14-member cartel pumped in 32.76 million barrels per day last month, representing a 79,100-barrel-per-day drop from July. Hopes of further extension to the pact by at least three months are adding to the optimism in the oil market.

As the deal aims to check the oil supply glut that has weighed on crude prices for more than three years, OPEC sees signs of a tighter global market and thus raised its global demand outlook for next year. The cartel expects global consumption to rise by 1.42 million barrels per day this year and 1.35 million barrels per day next year, up 50,000 barrels per day and 70,000 barrels per day, respectively, from the previous projection. On the other hand, supply from non-OPEC countries would remain unchanged at 780,000 barrels per day for this year but would decline by 100,000 barrel per day from the previous forecast to 1 million barrels per day for next year.

The International Energy Agency (IEA) projects global demand this year to climb the most in two years as global glut has started to shrink due to stronger-than-expected consumption in Europe and the United States as well as production declines in OPEC and non-OPEC countries.
It raised global oil demand outlook by 1.7% to 1.6 million barrels per day for this year and by 1.4% to 1.4 million barrels per day for the next.

Though inventories in developed economies are still 195 million barrels above the five-year average, it declined by 18.7 million barrels per day in July and will soon fall to this level given robust demand outlook and falling supplies. Unrest in Iraq and Venezuela will also keep output at check.

If these weren’t enough, the U.S. Energy Information Administration lowered its oil production forecast for this year and the next by 1% and 0.7%, respectively. The agency expects crude production at an average 9.25 million barrels per day for this year and 9.84 million barrels a day for the next.

State of Backwardation: A Big Bull for Oil

Further, the oil market has entered into a state of backwardation, where later-dated contracts are cheaper than near-term contracts, after three long years when oil price was above $100 per barrel. This signals that the oil market is tightening and demand is robust, paving the way for oil rally. Futures contracts for Nov 2017 Brent crude is $55.16, higher than the $54.86 futures contracts for Dec 2017, per This trend will likely prevail until May 2018, which is the biggest bullish catalyst for the commodity.

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Article printed from InvestorPlace Media,

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