Oil Stocks Jump on Promised Production Freeze
By Anthony Jerdine April 13, 2016
Shares of offshore driller SeaDrill Limited (SDRL) skyrocketed Tuesday, climbing almost 30% to a high of $3.99, fueled by a 4.5% rise in oil prices. This continues the tug-of-war between the bulls and bears the market has witnessed over the past couple of weeks.
Another Case of “Too Fast, Too Soon?”
On Tuesday the bulls sent oil prices higher on reports that Saudi Arabia and Russia have agreed to a production freeze ahead of the producers meeting in Doha, Qatar on Sunday. This was further driven by a Reuters report suggesting the government expects the U.S. crude output to decline by 560,000 barrels per day in 2017 to 8.04 million barrels per day.
“People are now realizing that this OPEC meeting could be a historic turning point for the market,” Phil Flynn, an analyst at Price Futures Group, told Reuters. “Now, with U.S. production cuts, our sense is that we’re entering a new cycle upwards.”
SDRL shares closed Tuesday at $3.83, rising 24.35%. The company makes money from drilling contracts, supplying drilling services for oil and gas wells. And as oil prices rise, it raises optimism about the company’s potential revenue in the quarters ahead. Not to mention, rising oil improves the prospects for more favorable drilling contracts. But is this another case of “too fast, too soon?”
As it now stands, U.S. oil prices are now at their 2016 highs and well above $40 per barrel – an important near-term psychological benchmark. On Tuesday, Crude oil (West Texas Intermediate) closed at $42.17 per barrel, while Brent crude closed up $1.86, or 4.3% at $44.69, according to CNBC.com. But as we’ve seen in recent weeks, oil can take a sudden negative turn.
Investors should remain vigilant, if not a bit skeptical, that a meeting between members of OPEC (Organization of Petroleum Exporting Countries) Sunday will result in a production freeze.
“The market appears to be taking a lot of support from positive statements. But, this isn’t the first time the Russians have come out and made remarks related to a production freeze being imminent,” said Gene McGillian, a senior analyst at Tradition Energy, according to CNBC.
Despite Tuesday’s massive rise in the share price, SDRL stock has suffered 64% declines over the past twelve months, compared to a 2% decline in the S&P 500 (SPX) index during that same span. Is now the best time to take some profits from SDRL shares? The stock has a consensus sell rating and an average analyst 12-month price target of $1.73, implying a decline of 55% from Tuesday’s close.