By Jeff Reeves, MarketWatch
The big news this week was an OPEC deal, finalized Saturday, to cut oil production. The deal finally made good on talk about a worldwide cut in oil production. The deal resolves to remove about 2% of global oil production, with the Organization of Petroleum Exporting Countries’ member states cutting 1.2 million barrels of daily output and non-OPEC producers, including Russia, reducing 600,000 barrels daily.
The news earlier in the week that a deal had been struck had a big impact on the market, resulting in a roughly double-digit move for oil /zigman2/quotes/209723641/delayed CLF27 +0.71% , putting prices above $50 again for the first time since June. And a number of smaller energy companies have exploded higher, including:
• Domestic explorer Whiting Petroleum Corp. /zigman2/quotes/204602363/composite WLL +0.97% , up 25%.
• Oil-field service company RPC Inc. /zigman2/quotes/201485709/composite RES +1.82% , up 16%.
• Deepwater driller Transocean Ltd. /zigman2/quotes/208905612/composite RIG -0.26% , up 15%.
• Refiner Sunoco L.P. /zigman2/quotes/208614298/composite SUN +0.38% , up 13%.
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However, one interesting development of the past few days has been the rather tepid response from Big Oil stocks. Even as these smaller names rallied nicely, giants like Royal Dutch Shell /zigman2/quotes/205095589/composite RDS.A -0.33% /zigman2/quotes/207682964/composite RDS.B -0.51% and Chevron Corp. /zigman2/quotes/205871374/composite CVX +0.95% were only up 3% or so — and Exxon Mobil Corp. /zigman2/quotes/204455864/composite XOM +0.69% was barely in the green with a gain of less than 1%!
So what gives?
Well, the bottom line is still the bottom line for big oil companies — and unfortunately, even a few extra bucks tacked on to a barrel of oil is not going to undo the past 10 years of pain.
Big Oil is stuck in a secular decline. And that means all investors should be wary of thinking a recovery in oil prices is a sign that oil giants like Chevron and Exxon are back.
A story of supply and demand
It’s a bit reductive, but the story of Big Oil’s troubles are all about simple supply and demand trends.
On the supply side, a global glut of oil has continued steadily for some time. According to the International Energy Agency , world oil supply has expanded from 90.4 million barrels a day in the beginning of 2013 to 97.2 million barrels a day as of the end of the third quarter of 2016. That’s an 8% expansion in just three years, and occurring even as oil prices crashed from about $90 a barrel to current “highs” around $50.
It’s important to remember that a big reason for this surge in supply is the emergence of the United States as a global energy superpower, taking the top spot in global oil production in 2014 and only recently ceding it to Saudi Arabia. The surge in U.S. production over the last decade is simply amazing, from just under 5.1 million barrels a day in 2006 to 9.4 million in 2015 — a surge of 84%!