No Good News Ahead for Oil Prices or Stocks

Despite probably new OPEC production cuts, US fracking will tarnish black gold.

Oil stocks have been market laggards for some time and there doesn’t appear to be  a lot of good pricing news in 2020, thanks to a continuing glut of crude. Long-suffering investors in energy companies aren’t expected to get much relief.

A poll of 42 economists by Reuters shows they expect to see the Brent price dipping to $62.50 a barrel next year, versus $64 now.

This has been a pretty punk 10 years for oil, with the worst of it during the commodity’s crash in mid-decade. No surprise, energy stocks in the S&P 500 have returned just 5% this year, including dividends. Compare that to a 28% total return for the S&P 500 as a whole. A big part of that is the tumble of crude prices—a small bounce back last year has led to a retreat since.

Another factor limiting oil shares is the growing sentiment to get pension plans and university endowments to dump energy stocks to combat climate change. The recent halftime disruption at the Yale-Harvard game, where protesters were pushing for the schools to divest energy holdings, illustrates the pressure some asset owners are under to get out of fossil fuels.

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The upcoming meeting of the Organization of the Petroleum Exporting Countries, on Thursday and Friday in Vienna, should lead to another effort to cut production. Last year, OPEC agreed to a reduction of 1.2 million fewer barrels daily than it produced previously.

That plan is likely to stay in place. Deeper cuts, to as much as 1.8 million barrels, are rumored to be on the table. The US is doing its part by forcing sanctions on Iran, which has choked off a lot of its oil exporting.

Trouble is, American fracking is expanding. The US Energy Information Administration expects 2020 to feature even stronger production, and that the nation will become a net exporter then, for the first time since 1953. That fracking phenomenon has rendered once-fearsome OPEC a lot less potent nowadays.

If another attack on Saudi production facilities occurs, that will boost oil prices (although the effect of the one earlier this year was temporary, as the kingdom quickly restored its capacity). And if a slumping US economy next year leads to a weaker dollar, that could elevate crude prices, as well. The dollar and oil move in opposite directions.

Meanwhile, nothing much appears on the horizon to levitate oil stocks.

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