Today I’ve got a “below the surface” read on what is really happening inside OPEC.
Frankly, I had not planned to devote so many essays to the cartel and its policies. After all, the organization is no longer the center of the energy universe.
But it’s my job to bring you the hottest developments in the world of energy – the shifts that will have the biggest impact on your investments and your money.
What is taking place within OPEC’s ranks is shaping up to be the most important new direction in years. It is a story that is growing with each passing day, signaling a changing of the guard in oil and a broader restructuring in the energy space as a whole.
Make no mistake. We plan to make some nice profits from both of these developments.
Here’s what just happened…
Non-OPEC Production Slips
OPEC announced three matters of interest this morning in its monthly market report.
First, it forecast a decline in non-OPEC production in 2015. The chunk of this, of course, comes from the U.S. and Russia.
These were the two targets of the Saudi-led decision last November to hold production constant. Since then, the Russians were the first to blink. And this week, the Energy Information Administration (EIA) figures pointed toward a peaking – and eventual decline – of domestic American production.
Combined with rising geopolitical tension in places like Iraq, Iran, Yemen, Nigeria, and Venezuela, this has translated into an accelerating oil pricing picture.
The oil price is finally giving a bit back to the market today but has been rising consistently of late. West Texas Intermediate (WTI), the crude oil benchmark traded in New York, closed yesterday up 5.8% for the day, 11% for the week, and a very nice 30.9% for the month. Meanwhile, Dated Brent (the London-set benchmark rate more widely used internationally) posted rises of 2.5%, 3.8%, and 12%, respectively.
As I have mentioned several times recently, this will not translate into prices jumping back up to $90 a barrel. While price is still essentially the relationship between supply and demand, one side of that dynamic is no longer at issue.
There is ample supply to meet any spike in demand or short-term decline in production from existing wells.
Profits Are Coming As Oil Prices Ratchet
Nonetheless, the forward trajectory of oil prices should exhibit a “ratcheting” effect – an overall movement up punctuated by intermittent pauses or declines. My published forecasts hold at $60-65 a barrel for WTI and $70-72 for Brent by July; $70-75 (WTI) and $78-82 (Brent) by the end of the year. It now looks like we may come in a little higher for July, but don’t expect a race up anytime soon.
Of course, even at my projected levels, there will be some very nice profit moves coming.
The first element in today’s OPEC announcement also smacks of a self-fulfilling prophecy, given the statement in OPEC’s recent Bulletin commentary. There, as we discussed last time (“OPEC Just Confirmed It’s Losing the Oil War”), the cartel blasted non-OPEC producers for their “go it alone” strategies that OPEC claims have resulted in the global oversupply.
Global Demand Increases
Second, today’s missive points toward an increase in global demand beyond initial OPEC projections. This morning’s call is for an additional 80,000 barrels per day worldwide. This is likely to be the first of several demand upgrades to be released between now and year end.
Watch for the next International Energy Agency (IEA) report. Its reported demand increase will be even larger.
Some of this rise in demand is the result of greater worldwide usage of cheaper oil products. In itself, this reflects something that almost always happens in the market. When an essential commodity like energy become less expensive, people tend to use more of it.
But there is an additional dimension with oil. Its price is not determined by demand or usage levels in North America and Europe. Instead, for years the price has truly been set by the world’s developing nations. This will continue to be the case during the next several decades as demand in Asia surges, along with the price of oil.
The Saudis Are Losing Control of OPEC
However, the demand increase is more than offset by the third factor in today’s OPEC release. The organization noted that OPEC member production has surged by 810,000 barrels per day. This mostly comes from increased production in Saudi Arabia, as we discussed in the last OEI.
But it also illustrates the soft underbelly in the cartel’s strategy. The Saudi increase demonstrates it can no longer control production beyond monthly quotas from other OPEC countries.
This is the other shoe dropping in OPEC’s declining influence. Controlling 40% of the world’s crude production just does not buy the market control it used to.
The Saudi rise in pumping volume is reflective of its strategy in the mid-1980s. Then, in the midst of depressing oil prices, it dealt with overproduction by other OPEC members by opening up its own spigots and flooding the world with Saudi crude.
The lesson was quickly digested and the rest of OPEC scaled back production.
This time around, OPEC is portraying the rise in aggregate production levels as a cartel-wide phenomenon. In reality, this is a Saudi move to thwart other members that are cheating above their quotas. It’s also an attempt to portray the market situation as demanding additional cuts by non-OPEC countries.
This strategy will not work this time for two reasons:
- First, the production base is moving from OPEC to other parts of the world, especially (back) to the U.S. The “call on OPEC” has been replaced by the “call on shale.”
- Second, and of far greater importance at the moment, these moves are signaling a major revision in OPEC itself.
Despite its domineering position, Saudi Arabia is losing control over cartel policy. The current pricing picture has required that several OPEC nations overproduce in order to survive financially. The Saudi production increase is a fait accompli blanketing over what was occurring in the cartel against its wishes anyway.
We are rapidly moving into a new energy world. And the rationale for OPEC is being undercut along the way. I’ll continue to monitor the situation and will tell you everything you need to know first.
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