Why oil stocks are under pressure

The OPEC merry-go-round continues. After surprising the market in early March by maintaining supply restrictions until April, the group of oil-producing countries decided to surprise the market recently by increasing production levels in May and then again in June and July.

Image source: Getty Images.

These actions have a distorting effect on the price of oil, and shareholders of major oil companies like Western Oil (NYSE: OXY) feel it too. After surging in early March on the rise in oil to $ 65 a barrel, Western stock fell 7.6% on Monday and the price of oil is now below $ 60 a barrel as of this writing.

OXY chart

Data by YCharts.

The decision to increase supply is a victory for Russia, often seen as favoring increased production to maximize revenues from pumping oil. In contrast, the main driver of supply reduction, Saudi Arabia, has tended to favor higher oil prices.

As always with investors in commodities and commodity stocks, it’s a good idea to keep an eye on demand as well as supply. The growth of the global economy will increase demand in the future, and ultimately the interaction of supply and demand will determine the price of oil.

OPEC’s sudden application and release of the brake on oil production has an artificial short-term impact on the price. But the reality is that OPEC members still have to sell oil, and oil-importing countries still have to buy. One wonders what the long term impact such actions really have, something Western investors need to consider as the stock price is jostled in the short term.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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Felix J. Dixon