What's going on?
The price of oil hit its highest level in 18 months over the holidays, giving investors hope that 2018 will be a much better year than 2017 for the stock prices of energy companies.
What does this mean?
A couple of short-term factors helped propel the oil price higher, including an explosion at a pipeline in Libya that disrupted supply. But December’s rising oil price continued a trend that started in the summer – it’s up 50% since then. The surge appears due largely to the success of an OPEC-led agreement to cap oil production (less supply leads to a higher price, all else equal). In late November, the participating countries agreed to extend their agreement to cover all of 2018.
Why should I care?
For markets: Energy was the worst-performing sector in 2017, but the tide may be turning.
While most stocks had a stellar year in 2017, stocks of energy companies (e.g. those that supply oil or provide services to oil producers) lost money for investors. But as the oil price has ticked up, energy stocks have followed, rising almost 10% in December.
The bigger picture: The oil price may soon be supported by a supply shortage.
When the price of oil fell sharply in 2014 and 2015, many oil producers slashed their exploration and production budgets. The volume of new oil discovered has fallen every year since 2014, and 2017 saw the smallest amount found since the 1940s. One argument is that this will lead to a shortage of supply (relative to demand, which is still increasing) – which would be positive for the oil price over the longer term.