Best of the Week
Most Popular
1. Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - Nadeem_Walayat
2.Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - James Burgess
3.Gold Price Trend Analysis - - Nadeem_Walayatt
4.The Beginning of the End of the Dollar - Richard_Mills
5.Stock Market Trend Forecast Update - - Nadeem_Walayat
6.Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - Troy_Bombardia
7.Precious Metals Sector: It’s 2013 All Over Again - P_Radomski_CFA
8.Central Banks Have Gone Rogue, Putting Us All at Risk - Ellen_Brown
9.Gold Stocks Forced Capitulation - Zeal_LLC
10.The Post Bubble Market Contraction Thesis Receives Validation - Plunger
Last 7 days
May BrExit Deal Tory MP Votes Forecast, Betting Market Analysis - 10th Dec 18
Listen to What Gold is Telling You - 10th Dec 18
The Stock Market’s Long Term Outlook is Changing - 10th Dec 18
Palladium Shortages Expose Broken Futures Markets for Precious Metals - 9th Dec 18
Is an Inverted Yield Curve Bullish for Gold? - 9th Dec 18
Rising US Home Prices and Falling Sales - 8th Dec 18
Choosing Who the Autonomous Car Should Kill - 8th Dec 18
Stocks Selloff Boosting Gold - 8th Dec 18
Will Weak US Dollar Save Gold? - 7th Dec 18
This Is the End of Trump’s Economic Sugar High - 7th Dec 18
US Economy Will Deteriorate Over Next Half Year. What this Means for Stocks - 7th Dec 18
The Secret Weapon for Getting America 5G Ready - 7th Dec 18
These Oil Stocks Are a Ticking Time Bomb - 7th Dec 18
How Theresa May Put Britain on the Path Towards BrExit Civil War - 7th Dec 18
How easy is it to find a job in the UK iGaming industry? - 6th Dec 18
Curry's vs Jessops - Buying an Olympus TG-5 Tough Camera - 5th Dec 18
Yield Curve Harbinger of Stock Market Doom - 5th Dec 18
Stock Market Crashed While the Yield Curve Inverted - 5th Dec 18
Global Economic Outlook after Trump-Xi Trade War Timeout - 5th Dec 18
Stock Market Dow Plunge Following Fake US - China Trade War Truce - 5th Dec 18
Subverting BREXIT - British People vs Parliament Risks Revolution - 5th Dec 18
Profit from the Global Cannabis Boom by Investing in the Beverage Industry - 4th Dec 18
MP's Vote UK Government Behaving like a Dictatorship, in Contempt of Parliament - 4th Dec 18
Isn't It Amazing How The Fed Controls The Stock Market? - 4th Dec 18
Best Christmas LED String and Projector Lights for 2018 - Review - 4th Dec 18
The "Special 38" Markets You Should Trade ebook - 4th Dec 18
Subverting BrExit - AG Confirms May Backstop Deal Means UK Can NEVER LEAVE the EU! - 3rd Dec 18
The Bottled Water Bamboozle - 3rd Dec 18
Crude Oil After November’s Declines - 3rd Dec 18
Global Economic Perceptions Are Shifting - Asia China Markets Risks - 3rd Dec 18
Weekly Charts and Update on Equity Markets, FX Trades and Commodities - 3rd Dec 18
TICK TOCK, Counting Down to the Next Recession - 3rd Dec 18
Stock Market Key (Short-term) Support Holds - 3rd Dec 18
Stocks Bull Market Tops Are a Process - 3rd Dec 18
More Late-cycle Signs for the Stock Market and What’s Next - 3rd Dec 18
A Post-Powell View of USD, S&P 500 and Gold - 2nd Dec 18
Elliott Wave: SPX Decision Time Is Coming Soon - 2nd Dec 18
Junior Gold Stocks Q3’18 Fundamentals - 1st Dec 18
Little-Known BDC Stocks Thrive Amid Rising Rates and Earn Investors +7% Yields - 1st Dec 18
Ray Dalio: This Debt Cycle Will End Soon - 1st Dec 18
Bank of England Warns UK House Prices 30% BrExit Crash! - 1st Dec 18
Gold Fundamentals Improving but Not Bullish Yet - 30th Nov 18
What the Oil Short-sellers and OPEC Don’t Know about Peak Shale - 30th Nov 18
Global Economic Perceptions Are Shifting Imnplications for Stock Market - 30th Nov 18
The US Economy is Getting Worse. What this Means for Stocks - 30th Nov 18
Trailblazers Leading the Way in Online Reputation Management - 30th Nov 18
The Shift in Trend from Physical Printers to Online Printers - 30th Nov 18
UK House Prices 2019 No Deal BrExit 30% Crash Warning! - 30th Nov 18
Stocks Rallied, New Uptrend? - 29th Nov 18
The Fed Will Probably Stop Hiking Rates in 2019. What’s Next for Stocks - 29th Nov 18
Love. Fear. Inflation. A Precious Metals' Trifecta - 29th Nov 18
GBP/USD – Double Bottom or Further Declines? - 29th Nov 18
Stock Market Santa Rally Still a GO to Dow 27,000? - 29th Nov 18
UK Government and Bank of England BrExit Economic Armageddon Propaganda - 29th Nov 18
Why the Crude Oil Price Collapsed to $50 - 28th Nov 18
Gold Joins the Decline – the Earth is Shaking - 28th Nov 18
Watch This Picture As Asset Prices Fall - 28th Nov 18
GE’s Stock Price Crash Holds an Important Lesson About Investing - 28th Nov 18
5 Rules for Successful Trading - 28th Nov 18
Dollar Trend Imposes: EURUSD to Fall to 1.11 - 28th Nov 18
Gold, Original Money, Fiat Money - 28th Nov 18
When Will the Stocks Bull Market End? - 28th Nov 18
Looking ahead: Why the Smart Money is Investing in Green Energy - 28th Nov 18
The Yield Curve Will Invert Soon. What’s Next for the Stock Market - 27th Nov 18
Silver Trading and the Hands of a Broken Clock - 27th Nov 18
What's Inside SMIGGLE Christmas Advent Calender 2018 - 27th Nov 18
Investing in Recession Proof Trailer Parks - 27th Nov 18
The Advantages and Disadvantages of Debt Consolidation - 27th Nov 18
GDX, This Most-Hated Stock Could Return You 140% in Just a Few Months - 27th Nov 18

Market Oracle FREE Newsletter

How You Could Make £2,850 Per Month

How OPEC’s Attempt to Save Face Affects the Crude Oil Market

Commodities / Crude Oil Sep 03, 2015 - 06:14 AM GMT

By: ...

Commodities

Dr. Kent Moors writes: Just as I was finishing up Monday’s Oil & Energy Investor, information emerged that something was happening with OPEC. I made mention of it in a note appended at the end of that installment, finishing with the observation that it “Looks like somebody just blinked.”

Well, that somebody is OPEC, and there is much more behind this development, leading to today’s discussion.

In its monthly report released on Monday, OPEC indicated it is now willing to discuss production levels with other non-OPEC countries. This is the first indication that the low crude oil price environment has been creating serious problems inside the cartel.


However, this needs to be put in perspective. A “blink” is not “crying uncle.” And an op-ed piece appearing in the OPEC Bulletin is not a blanket statement of a policy change. But just the same, comments don’t find their way into this publication without the consent of the OPEC Secretariat in Vienna and the dominant Saudi presence within the organization.

The OPEC strategy of keeping production constant to maintain market share, even in the face of a precipitous decline in oil prices, has been unraveling for a while. As I have remarked in Oil & Energy Investor on numerous occasions over the last nine months, the approach has left the cartel seeing budgetary red ink.

Here’s what that means for OPEC’s production strategy… and the oil market as a whole…

How OPEC’s Strategy Fell Apart

As I noted in the last installment of Oil & Energy Investor, every OPEC member country is now running a budget deficit. Even the most solvent of the group – Saudi Arabia, Kuwait, and the United Arab Emirates – have been affected by this strategy. But the likes of Venezuela, Nigeria, Iran, Libya, and Ecuador are facing impending (or already existing) financial implosions.

For months now, the manner in which OPEC operates has been in disarray. The normal approach is for the Secretariat to estimate global demand and then deduct estimated non-OPEC production. What remains is referred to as “the call on OPEC.” That figure is then divided among members into monthly quotas.

However, with the exception of Iran (still laboring under Western sanctions) and Iraq (yet to be given a renewed quota from the cartel), each of the OPEC producers is now regularly producing (and exporting) well above its quota.

The reason is simple. Crude oil comprises the only revenue stream of any consequence. Therefore, despite the low prices, OPEC nations have had no choice but to exceed their quotas and sell volume into a declining market.

That is a recipe for pushing your own profits down at the same time as you drive oil prices south.

In a clear indication that the organization is experiencing disagreements from within, four of the countries (Iran, Libya, Venezuela, and Algeria) have publicly suggested OPEC should cut production, thereby providing an avenue for increasing prices. Nonetheless, the Saudis have been able to hold the line on production.

In fact, even the Saudis are now producing in excess. The rationale here is rather transparent. Riyadh can no longer prevent other OPEC members from overproducing. So by opening its own taps Saudi Arabia provides the pretense of a cohesive approach when actually there is none.

OPEC is now exploring an alternative approach to the market share competition. The cartel controls a smidgen more than 40% of global oil production. That means six out of every 10 barrels come from someplace outside OPEC.

What is now taking place are the first steps in an attempt to keep market share by entering into agreements with other producers. This has been attempted before with mediocre results. But this time, the last nine months may have taught the rest of the world a lesson that OPEC now wants to capitalize upon.

Why Saudi Arabia Is Looking to Russia for Help

Here’s what is unfolding. Contrary to the current theme among pundits, the immediate target of OPEC’s strategy is not American shale and tight oil producers. Rather, it is Russia. This has all the earmarks of an “any port in a storm” scenario.

Russia is the second-largest non-OPEC producer (U.S. now being the first), regularly sends observers to OPEC meetings, and has a line open to the cartel. However, it will never become a member for the simple reason that Moscow does not want other countries to dictate Russian production levels.

It has also been in direct competition with OPEC (the Saudis in particular) over access to the Asian market. All roads lead to Asia over the next several decades as the brunt of worldwide energy demand levels drives a path there.

In the early stages of OPEC maintaining production, the primary target was to bring the price low enough to make it unprofitable for Russian crude to move across the finished East Siberia-Pacific Ocean (ESPO) pipeline to Asia.

That was in large measure accomplished, although Russian volume is still likely to be increasing, longer term.

I am hearing that OPEC may be prepared to provide some Asian access to Russia in return for an “understanding” on volume. In return, pressure on prices may be relaxed.

Notice the usual suspect mentioned by analysts is noticeably lacking. The game changer in global supply levels has been U.S. unconventional production. But the shale patch is not at present represented in these fledgling talks.

The Threat of U.S. Shale Oil

Unlike Russia, there are two contrasting views held within OPEC about American production. One holds that it has only an indirect effect on prices because virtually all of it cannot be exported until Congress changes laws.

On the other hand, there is widespread belief within OPEC that the broad export of U.S. production is inevitable. This happens to be a view I share (as OPEC colleagues know only too well). If the volume is coming anyway, there seems to be added urgency in working out a more widespread understanding on monthly production.

Leading to the second overall point: U.S. production will be an ongoing factor. OPEC may hope that debt constrictions and domestic competition may wipe out some American companies. Yet those remaining will still prove to be a problem for the cartel, as the “call on shale” is beginning to replace the “call on OPEC” in determining global prices.

If you can’t effectively discuss production agreements between OPEC on the one hand and thousands of American producers on the other, move on Russia. At least its state entities continue to control almost all production and exports.

In some sense, it looks like OPEC is trying to find a face-saving alternative, declare victory, and bring prices back to better levels.

Russia has been losing revenue as well in the low price environment. The Kremlin would also like to see OPEC end its dual policy of increasing production and lowering prices. But it is hardly going to cave in at this point. Previous OPEC overtures on common strategy with Russia have only intermittently bone fruit.

It’s not likely to be any easier this time around… even with both sides feeling the financial pain.

Source http://oilandenergyinvestor.com/2015/09/how-opecs-attempt-to-save-face-affects-the-oil-market/

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