As oil prices rise it’s easy to be optimistic that oil and gas stocks might once again be good buys. Enbridge Inc (TSX:ENB)(NYSE:ENB) is down more than 13% in the past 12 months while Cenovus Energy Inc (TSX:CVE)(NYSE:CVE) is down more than 35% after hitting all-time lows in 2017.
We’re seeing many oil and gas companies succeed under a low price of oil and the rising commodity has helped give stocks a boost, at least for the time being.
The biggest danger is that the performance of these stocks will ultimately be tied to the price of oil, and investor shouldn’t be overly optimistic about that.
We’ve seen oil prices rise since the second half of 2017, but a lot of that is due to supply cuts that have been in place for over a year now and could be until the end of this year. If oil prices continue to rise, OPEC might finally say that the price is high enough, and that the supply cuts are over.
The problem is once everyone gets pumping again, and some countries may be looking to make up for lost time and production, we could be right back where we started – or even worse. As high as oil prices are right now, they are artificially there as a result of the supply cuts, and unless countries decide the restrictions are here to stay, there’s no reason to expect oil prices will either.
In the short term, oil and gas stocks will certainly rise along with increasing commodity prices, but we’ll likely see a big correction afterward.
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