skyrocketing oil prices: potential causes and reasons for further increases

Today's oil market is a wild ride, with the price per barrel remaining relatively low compared to what we've seen in recent years. Since the Ukraine-Russia war, we haven't witnessed $100 oil. Sluggish demand, plentiful supply, and the Saudis, who are the globe's most significant oil players, keeping the taps open, have all contributed to this trend.

But let's face it, oil can't stay around $50 or $60 forever. With the chaos unfolding in the Middle East, it's no secret that Israel has already struck Iranian oil-related targets, and things could intensify if the U.S. increases its involvement in the conflict. This geopolitical dynamic makes it more likely that oil prices could surge by year-end. I started beefing up my oil holdings back in April when the price hit around $55-60, and many high-quality oil and gas stocks still seem undervalued.

From a technical perspective, oil is slightly overbought at the moment, but it could dip to approximately $70-68 support. However, the days of $55-67 "ultra-cheap" oil might be behind us, so I'm prepared to invest more if there's a dip.

Setting the Middle East turmoil aside, the Saudis and other prominent oil producers, such as Russia, would likely prefer higher oil prices. The Saudis have their sights set on ambitious projects, like Vision 2030, estimated to cost a whopping $1.3 trillion. Even though Saudi Aramco can make money with oil at almost any level (below $10 operational breakeven cost), the Saudis would prefer higher prices to fund their massive projects and keep their purse strings loose.

Similarly, Russia, a substantial oil exporter, relies heavily on oil sales for government revenues. In 2024, around 30% of Russia's government revenue came from oil and gas sales. With oil prices creeping up, Russia can continue fueling its enormous war machine and fund other projects.

Even U.S. oil companies need higher oil prices. It's estimated that the breakeven oil price is about $64 for new wells. Higher oil prices would help oil executives, workers, and shareholders alike, as oil stock returns have been dismal in recent years.

But why settle for just breakeven? Oil executives, workers, and shareholders all want to see their pockets lined with more than just enough to cover costs. Take a look at companies like Exxon, Chevron, BP, and others. Exxon has been stuck around $100-$110 for about three years, and Chevron has been moving sideways for approximately 3.5 years. The oil majors and oil services segment have had a tough time, with the VanEck oil services ETF down around 36% from its 2023 high.

Now, big oil donated nearly $100 million to elect Donald Trump, and the industry spent an astounding $500 million on lobbying, congressional elections, and other expenses in 2024. So, it's safe to say that industry insiders, including the President and republican beneficiaries, won't let oil prices remain cheap for too long.

With Donald Trump and MBS having a decent relationship, it's not far-fetched to think that MBS is keeping a lid on oil prices to maintain a low oil and low inflation environment for the Trump administration. Yet, this dynamic likely won't last as the current Fed Chair's term is coming to an end next year, and the U.S. President will probably appoint a much more dovish Fed Chair. Even in an elevated inflation environment, a dovish Fed Chair will push for rate cuts, making it easier for oil prices to rise.

All in all, despite the short-term uncertainty, the medium- and long-term outlook for oil is very optimistic. Factors such as geopolitical uncertainties, the Israel/Iran conflict, and other elements could cause oil prices to rise from here.

Top Three Oil & Gas Stocks To Buy Now

Schlumberger (SLB): This leading oil and gas equipment and services company worldwide is reinventing itself as a technology company spearheading the oil and gas services technology and AI revolution. The stock is cheap, trading at around 10 times forward consensus EPS estimates. I expect sales growth and EPS growth to surpass expectations as the Fed loosens monetary policy and a higher oil price returns. The average price target on the street is about $47, and I believe SLB's share price can reach around $50-55 over the next year.
APA Corporation: APA is an independent energy company that explores, develops, and produces natural gas, crude oil, and more. With a forward P/E of about 8, APA could outperform sales growth and earnings expectations, especially if oil prices continue to climb and move into the $80-100 range. APA offers a 5% dividend, and I believe its stock price could be around $30-35 in a year's time.
Devon Energy (DVN): Devon is an attractive independent oil and gas exploration and development stock, offering a dividend of around 3.5%. With a forward P/E ratio of about 8 and an average 12-month price target on Wall Street of about $43, DVN represents an excellent value at its current depressed levels. Its forecasts are based on low, stagnant oil prices, so if oil prices rise to more realistic levels, Devon could be around $45-50 over the next year.

Other Oil & Gas Stocks to Consider

Outside of the majors and oil service stocks already mentioned, companies like Valero Energy, Kinder Morgan, NOV Inc., Hess, Halliburton, Baker Hughes, and others are also solid options in the oil and gas space. While some of these stocks may appear overbought in the short term, I believe they offer excellent "buy-the-dip" opportunities leading up to H2 2026 and beyond.

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The volatile oil market, currently witnessing prices below $100, might see a surge by the end of the year due to the geopolitical tensions in the Middle East.
Higher oil prices, around $70-68 support, could be reached from overbought conditions in the short term, despite the ongoing turmoil in the oil-and-gas industry.
Taking advantage of undervalued oil and gas stocks, like Schlumberger (SLB), APA Corporation, and Devon Energy (DVN), seems possible given their technological advancements and attractive valuations.
In the long term, some of the oil majors, such as Exxon, Chevron, BP, and others, could recover from their recent financial struggles as oil prices continue to rise.
The government's spending priorities, such as the Saudis' Vision 2030 project and Russia's reliance on oil sales for government revenue, depend on stable and higher oil prices.