What's going on?
Investors in oil companies got some much needed good news on Wednesday as the oil price hit its highest level in 15 months and one of America’s biggest energy companies, surprisingly, made a profit!
What does this mean?
Things might be looking up for the oil industry. The CEO of Halliburton, an oilfield services giant, struck an optimistic note for the industry as a whole, telling investors that “things are getting better for us and our customers” after two years of “devastation.” Meanwhile, the oil price jumped as the Saudi Arabian oil minister suggested more countries would sign a recent agreement to limit oil production and a report on oil inventories in the US showed less supply than anticipated.
Why should I care?
For the market: A lot rests on the oil price staying above $50/barrel, which is about where it is right now.
Many US oil producers “break-even” at roughly $50/barrel. A deal to limit oil production between Saudi Arabia and other countries has helped it jump just above that level – for now. The higher it goes, the more likely it is that US production will increase. This would be good for the US energy industry, but it would also put downward pressure on the oil price, which in turn would be bad for the US energy industry (it’s a bit of a catch-22). The effectiveness of the Saudi deal and the extent to which US production increases are likely to drive the oil price in the coming months.
The bigger picture: There’s still a lot of uncertainty concerning the oil industry’s medium-term future (e.g. 3-5 years from now).
Saudi Arabia and ExxonMobil – two huge oil producers – offered sharply different views on Wednesday. Saudi Arabia said that the relatively low oil price will lead to a significant reduction in supply in the coming years (as companies cut back on developing new oil fields). If true, that would eventually be a big positive for the oil price. Exxon’s CEO, however, thinks the opposite: in short, he believes there is still a ton of oil relative to demand, and that’s not likely to change anytime soon.