Best of the Week
Most Popular
1. Will Gold Price Breakout? 3 Things to Watch… - Jordan_Roy_Byrne
2.China Invades Saudi Oil Realm: PetroDollar Kill - Jim_Willie_CB
3.Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - Nadeem_Walayat
4.The Stock Market Trend is Your Friend ’til the Very End - Rambus_Chartology
5.This Isn’t Your Grandfather’s (1960s) Inflation Scare - F_F_Wiley
6.GDX Gold Mining Stocks Fundamentals - Zeal_LLC
7.US Housing Real Estate Market and Banking Pressures Are Building - Chris_Vermeulen
8.Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - Buildadv
9.Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - Nadeem_Walayat
10.Warning Economic Implosion on the Horizon - Chris_Vermeulen
Last 7 days
How Long Does it take for a 10%+ Stock Market Correction to Make New Highs - 21st Apr 18
Sheffield Ruling Labour Party Could Lose 10 Council Seats at May Local Elections - 21st Apr 18
Crude Oil Price Trend Forecast - Saudi Arabia $80 ARAMCO Stock IPO Target - 21st Apr 18
Gold Price Nearing Bull Market Breakout, Stocks to Follow - 20th Apr 18
What’s Bitcoin Really Worth? - 20th Apr 18
Stock Market May "Let Go" - 20th Apr 18
Overwhelming Evidence Against Near Stock Market Grand Supercycle Top - 20th Apr 18
Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - 20th Apr 18
The Incredible Silver Trade – What You Need to Know - 20th Apr 18
Is War "Hell" for the Stock Market? - 19th Apr 18
Palladium Bullion Surges 17% In 9 Days On Russian Supply Concerns - 19th Apr 18
Breadth Study Suggests that Stock Market Bottom is Already In - 19th Apr 18
Allegory Regarding Investment Decisions Made On Basis Of Government’s Income Statement, Balance Sheet - 19th Apr 18
Gold – A Unique Repeat of the 2007 and How to Profit - 19th Apr 18
Abbeydale Park Rise Cherry Tree's in Blossom - Sheffield Street Tree Protests - 19th Apr 18
The Stock Market “Turn of the Month Effect” Exists in 11 of 11 Countries - 18th Apr 18
Winter is Coming - Coming Storms Will Bring Out the Best and Worst in Humanity - 18th Apr 18
What Does it Take to Create Living Wage Jobs? - 18th Apr 18
Gold and Silver Buy Signals - 18th Apr 18
WINTER IS COMING - The Ongoing Fourth Turning Crisis Part2 - 18th Apr 18
A Stock Market Rally on Low Volume is NOT Bearish - 17th Apr 18
Three Gold Charts, One Big Gold Stocks Opportunity - 17th Apr 18
Crude Oil Price As Bullish as it Seems? - 17th Apr 18
A Good Time to Buy Facebook? - 17th Apr 18
THE Financial Crisis Acronym of 2008 is Sounding Another Alarm - 16th Apr 18
Bombs, Missiles and War – What to Expect Next from the Stock Market - 16th Apr 18
Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold - 16th Apr 18
Will Bitcoin Ever Recover? - 16th Apr 18
Stock Market Futures Bounce, But Stopped at Trendline - 16th Apr 18
How To Profit As Oil Prices Explode - 16th Apr 18
Junior Mining Stocks are Close to Breaking Downtrend - 16th Apr 18
Look Inside a Caravan at UK Holiday Park for Summer 2018 - Hoseasons Cayton Bay Sea Side - 16th Apr 18
Stock Market More Weakness? How Much? - 15th Apr 18
Time for the Gold Bulls to Show their Mettle - 15th Apr 18
Trading Markets Amid Sound of Wars - 15th Apr 18
Sugar Commodity Buying Levels Analysis - 14th Apr 18
The Oil Trade May Be Coming Alive - 14th Apr 18

Market Oracle FREE Newsletter

Trading Lessons

Here’s What Happens When Crude Oil Geo-Policy and Market Reality Collide

Commodities / Crude Oil Aug 26, 2015 - 10:30 AM GMT

By: ...

Commodities

MoneyMorning.com Dr. Kent Moors writes: Over 220 years ago, a Scottish writer by the name of Thomas Carlyle provided a personal account of what Paris was like during the French Revolution. The three-volume work (which at one point I suggested in an academic article was two volumes longer than necessary) is full of personal anecdotes. One of them is particularly relevant these days.


On a hot afternoon, Carlyle was sitting in a coffeehouse with a supposed high fellow of the revolution. Suddenly a shouting crowd with raised pitchforks rushed by. The revolutionary jumped to his feet, apologized to Carlyle, and said: “Those are my people. I am their leader. I must follow them.”

Cut to yesterday.

The last two trading sessions have prompted a frantic rush among investors to find whatever safe haven from a global market implosion may be available. Yet, in my circles, there is an even more interesting development afoot, one that brings back Carlyle’s 1790 conversation.

Here’s what’s really going on in the oil markets right now… 

OPEC’s Backfiring Plan

What had begun as a calculated move by OPEC producers to protect market share has morphed into a crushing decline in crude oil prices. The downward spiral in the oil market now has a life of its own. And in the process, its creators are panting to catch up.

Like a snowball racing down the mountain, those who set it in motion no longer control where it is heading.

Beginning last November (on Thanksgiving, no less) OPEC started the policy assault by deciding to keep production constant. By doing so, it telegraphed an intention to protect its international market share rather than the price.

What followed was the first of two significant pricing slides.

In the process, it became clear that not all cartel members were in the same boat. While all members were experiencing shortfalls in revenue – requiring deficit financing for central budgets – only Saudi Arabia, Kuwait, and the United Arab Emirates (UAE) could afford to carry the policy along without serious financial problems.

Other OPEC members, such as Venezuela, Libya, Algeria, Nigeria, Iran, and even Ecuador (the smallest producer and exporter in the group), require triple-digit crude prices to have any hope of balancing already suspect budgetary outlooks.

The Saudis Target Russia and the U.S.

That translated into a rising desperation among the also-rans to produce and export well above their monthly quotas. The receipt shortage was demanding that they sell additional amounts of oil into an already oversupplied market. That drove prices down further.

No longer able to control the situation, the Saudis decided to continue appearances as the “leader” of OPEC and increase their own production and sales. That way, the overproduction could be portrayed as a cartel-wide decision. Of course, prices went down in consequence.

There were two targets for these machinations. The first is the Russians. Moscow has a completed ESPO (Eastern Siberia-Pacific Ocean) pipeline with a crude oil grade better than Saudi exports destined for the Asian market.

The Saudis needed to offset that competition in what is becoming the principal worldwide energy market. By cutting prices significantly, Riyadh is requiring that Moscow move oil to Asia at a loss. Recent strong statements from state giant Gazprom that the trade will continue despite Saudi moves are actually a recognition that the OPEC policy is working in limiting Russian exports to the energy-thirsty region.

The second target is the one getting all the media attention. U.S. shale and tight oil production had been accelerating, with the traditional “call on OPEC” being replaced by the “call on shale” in setting prices.

Now the American impact remains indirect, since the vast bulk of domestic production cannot legally be exported. Yet OPEC knows that more than 80% of the world’s extractable shale and tight oil is not located in North America.

That means the contest with the American oil patch is the “test case” for a problem they will be increasingly facing as other countries turn to developing local unconventional volume.

The Chinese Stock Market Implosion Changes the Game

And then the other shoe fell. Two of them, actually, and both Chinese.

First, Beijing began importing more African oil, especially from other OPEC members Angola and Nigeria. The prospect has required Saudi Arabia to lower its own export prices and to enter into an intra-OPEC competition.

Left in the wake as well is Iran, which has relied on China as its primary trading partner throughout the period of Western sanctions.

Normally, lowering prices to one region would result in raising export prices to others, especially in this already reduced pricing environment. But then the second shoe fell.

The Chinese stock market implosion hit. Not only has this introduced concerns (largely overblown, in my estimation) of an impending major decline in Chinese energy needs. The market collapses in Shanghai and Sichuan have ushered in a global market meltdown.

This dual whammy from the Orient has slashed crude oil prices well below where OPEC wanted them. The policy they had introduced to maintain their market share in the face of competitors is now under the direction of forces beyond their control.

As I write this, it is 1 a.m. U.S. Eastern Time. Shanghai is down another 4%. OPEC will need to reassess its strategy shortly.

Carlyle must be smiling in his grave. Déjà vu is like that.

Source http://oilandenergyinvestor.com/2015/08/heres-what-happens-when-oil-geo-policy-and-market-reality-collide-2/

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules