By Brett Eversole
The price of oil is up 22% over the last month. More than 9% of that return came in just one day. That’s crazy! After a move like that, oil must be due for a breather, right?
History tells a different story; one that’s far more interesting.
In short, larger gains are possible. We could see $70-a-barrel oil over the next year. And 41% gains are possible over the next two years, based on history.
Let me explain:
Oil prices have been all over the place in 2016. They were in the $20s at the start of the year and then nearly doubled, having since bounced around at less than $50. Until the recent breakout, at least.
Oil jumped 9% in a single day. Meanwhile, oil has risen up 22% just over the past month. That’s a major breakout. What caused this incredible return?
OPEC – the global oil cartel – recently announced it would cut global oil production, which dramatically changed the supply-and-demand outlook for oil.
History says this could mean much higher oil prices, starting now.
OPEC’s ability to control the price of oil isn’t what it used to be. Yet, the organization still makes up roughly one-third of the global oil market share while controlling more than 80% of the world’s proven crude-oil reserves (based on OPEC’s 2015 estimates).
OPEC has only cut its production a handful of times since 1998. But as the table below shows, production cuts usually lead to higher oil prices. Take a look at the returns:
|After OPEC Cut||6.9%||31.5%||41%|
OPEC’s production cuts don’t happen often; in fact, only 14 other times have these cuts occurred since 1998. However, oil prices generally soared after these cuts.
We’ve seen average one-year gains of 31.5% and average two-year gains of 41%. A 31.5% gain from here means oil prices would hit $70 sometime next year, whereas a 41% two-year gain would put oil around $75 a barrel.
That might seem like a crazy move higher. A $75 price is roughly triple the low we saw earlier this year. Nonetheless, with history as a framework, the move is completely possible.
The facts here are simple. OPEC agreed to make production cuts, and oil staged a major breakout as a result.
If history is any guide, we should expect much higher oil prices next year. And 41% gains are possible over the next two years.