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Trading Lessons

The Inside Story on OPEC’s Oil Price War

Commodities / Crude Oil Dec 02, 2014 - 09:23 AM GMT

By: Money_Morning

Commodities

Dr. Kent Moors writes: My meetings here in Dubai are at the Burj Al Arab, the fabled “seven-star hotel” built like a huge ship’s sail on its own man-made island.

At center stage are some of the region’s top oil policy makers, including a rather impressive forty-one year old, His Excellency Suhali Mohamed Faraj Al-Mazrouei.


As the Minister of Energy here in the United Arab Emirates (UAE), His Excellency occupies a key place in the center of OPEC’s oil war.

Together, these are some of the very people involved in OPEC’s recent decision to maintain current production levels.

What I’ve learned at these meetings is setting up one of the best opportunities in decades…
It’s Official, OPEC Has Declared an Oil Price War

Of course, Marina and I had been planning this trip for some time. A twenty-fifth wedding anniversary comes just once. And from the beginning, our week-long stay at this amazing hotel was going to be the centerpiece of our multi-city tour.

Then the oil war broke out…

And as is often the case in my life, the two events happened to coincide, setting up this series of meetings with key officials in Dubai.

Now, the truth is that nobody is really certain about what comes next in the Persian Gulf. But a symbolic omen of sorts did hit this morning.

Here in Dubai, where the desert meets the water, something very unusual occurred. It rained.

The accompanying clouds have appeared figuratively in my meetings over the past several days as well.

Given the big time difference in the weekly schedule in this part of the world, the Dubai Stock Exchange (DSE) was open on Sunday and today in advance of a two-day national holiday. That gave my meetings much more focus.

As felt elsewhere throughout the world, stocks on the DSE were hammered in the aftermath of OPEC’s decision to maintain current production levels in the face of falling oil prices.

Dubai is now a center for things other than oil, including real estate, finance, and trade. The other six emirates, however, led by Abu Dhabi, are still dependent on global oil price swings.

And in the center of it all, is His Excellency Suhali Mohamed Faraj Al-Mazrouei, who has been the Minister of Energy for almost two years now. As happens in places like the UAE, he began his career at any early age, acquiring experience in several ministries and with the major national oil companies.

His English is impressive, as expected from a 1996 graduate of the University of Tulsa (in petroleum engineering; no surprise). And his demeanor is even more so.

His opinion reflects the swing position in OPEC – between the dominant Saudis and those members who have clamored for a cut in production to bolster the price.

This latter camp includes Nigeria, Venezuela, and especially Iran. Each of these countries needs the price to be above $100 a barrel to support badly balanced budgets. Meanwhile, other members are also showing signs of concern as the price hovers around $70 a barrel.

All of which simply intensifies the divisive nature of last week’s decision at the OPEC session in Vienna to maintain current production levels.

The Minister was quick to emphasize the global responsibility in balancing supply and demand to avoid price volatility. Yet, privately he acknowledges the cartel’s objectives are now in a direct collision course with unconventional production elsewhere in the world, especially in the shale rich U.S.

The U.S. is in the Saudi Crosshairs

As I’ve noted previously, there are three distinct targets involved in the Saudi-led move to maintain production levels.

One is certainly U.S. oil production, which is set to surpass Saudi production shortly. The second is the non-OPEC production from Russia, especially as it relates to competition over the Asian market. The third is simply to keep order in what is already a deepening rift within OPEC itself.

Now there are a number of dimensions to all three of these, and I’ll be expanding on what it looks like from the inside of OPEC policy-making in the next issue.

Yet, His Excellency does not accept my characterization of this as an oil war. At least not publicly.

Sandwiched between Iran across the water and Saudi Arabia to the south, the UAE is used to practicing moderation. That occasionally means they simply duck, especially when U.S. policy interests are affected.

Nonetheless, His Excellency well understands that OPEC is just buying itself a few years with its current actions. With all the attention being accorded to U.S. shale and tight oil, the argument that American production is responsible for the pricing problem is a bit disingenuous.

As I’ve recently noted, the impact of shale at the moment is limited to its effect on American imports. The export of crude from the U.S. is still prohibited. However, quite apart from the shale revolution, U.S. reliance on OPEC imports has been waning for years.

Given the new-found economic impact of oil production back home, I quickly pointed out to those gathered that the OPEC decision is likely to give the new Congress added impetus to liberalize the very exports the cartel fears.

It is the most direct self-fulfilling prophecy imaginable in this business. Around the table, nobody disagreed.

I further suggested OPEC’s major wall is 3-5 years away, tops. By that time, a combination of alternative production, renewables, and redirected trade will mean the effective end of OPEC’s oil hegemony. Controlling about 40% of the world’s oil is no longer the baseball bat it once was.

Again, nobody disagreed.

So buying time is all that OPEC has left. Of course, the essential battle is far from over. This one will largely take place over Asia, the main remaining market.

Yet, in the course of the war announced last week, the U.S., Russia, Europe, and much of the financial world that funds the energy conflict will hammer out a new playing field.

As it stands, I have several more days here in Dubai, followed by sessions in London with the folks who largely fund the energy world. So by the time Marina and I return to the states on December 11, I’ll have a pretty clear picture of what is unfolding.

Of course, there’s one other matter of some note: How we are going to make money from all of this?

Because make no mistake, this is going to provide the biggest opportunity in energy investing in decades. And there’s no better place to be than on the ground floor.

I’ll have more on this as it develops.

Next up, I’ll discuss OPEC’s real policy agenda.

Source : http://oilandenergyinvestor.com/2014/12/exclusive-inside-story-opecs-oil-price-war/

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