Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Boris Johnson Hits Coronavirus Panic Button Again, UK Accelertoing Covid-19 Second Wave - 25th Sep 20
Precious Metals Trading Range Doing It’s Job to Confound Bulls and Bears Alike - 25th Sep 20
Gold and Silver Are Still Locked and Loaded… Don't be Out of Ammo - 25th Sep 20
Throwing the golden baby out with the covid bath water - Gold Wins - 25th Sep 20
A Look at the Perilous Psychology of Financial Market Bubbles - 25th Sep 20
Corona Strikes Back In Europe. Will It Boost Gold? - 25th Sep 20
How to Boost the Value of Your Home - 25th Sep 20
Key Time For Stock Markets: Bears Step Up or V-Shaped Bounce - 24th Sep 20
Five ways to recover the day after a good workout - 24th Sep 20
Global Stock Markets Break Hard To The Downside – Watch Support Levels - 23rd Sep 20
Beware of These Faulty “Inflation Protected” Investments - 23rd Sep 20
What’s Behind Dollar USDX Breakout? - 23rd Sep 20
Still More Room To Stock Market Downside In The Coming Weeks - 23rd Sep 20
Platinum And Palladium Set To Surge As Gold Breaks Higher - 23rd Sep 20
Key Gold Ratios to Other Markets - 23rd Sep 20
Watch Before Upgrading / Buying RTX 3000, RDNA2 - CPU vs GPU Bottlenecks - 23rd Sep 20
Online Elliott Wave Markets Trading Course Worth $129 for FREE! - 22nd Sep 20
Gold Price Overboughtness Risk - 22nd Sep 20
Central Banking Cartel Promises ZIRP Until at Least 2023 - 22nd Sep 20
Stock Market Correction Approaching Initial Objective - 22nd Sep 20
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

What an America First Trade Policy Could Mean for the US Dollar

Commodities / Crude Oil May 22, 2017 - 02:46 PM GMT

By: John_Mauldin

Commodities

JACOB L. SHAPIRO : It was only a few months ago that OPEC, once the de facto arbiter of oil markets, seemed to have a plan to inflate the price of oil: The cartel, along with several non-OPEC members, agreed in December to cut production by roughly 1.2 million barrels per day.

And for the first quarter of 2017, OPEC largely made good on its pledge. It produced 1.1 million fewer barrels of oil per day in the first quarter of 2017 than it did in the final quarter of 2016. Saudi Arabia, OPEC’s largest producer, accounted for 55% of the cuts.


And yet on May 4, oil prices reached a new low for the year, dropping to roughly $48 per barrel and hovering there ever since. The original deal wasn’t meant to return oil prices to previously high levels; it was meant only to keep them from crashing altogether.

Still, the plan appears to be failing, and its failure bodes ill for Saudi Arabia—and for Russia, which was a little disingenuous in how much its own cuts would affect prices.

The Saudis Cannot Dictate Prices

Saudi Arabia can shoulder so much of the burden of production cuts because, unlike most other countries, it has roughly $500 billion of reserves to fall back on. Put simply, it can afford short-term losses that other countries cannot. When prices are in the $50 per barrel range, as they have been for most of 2017, Riyadh doesn’t have to dip too far into its reserves to cover its budget deficit.

But the prospect of low prices, not to mention the reinstatement of government spending on public sector salaries and bonuses, means that Riyadh will soon feel the pain that so many other countries have felt for some time. The days when Saudi Arabia could dictate market prices by itself have passed. And so the country needs to do what it can to maximize value now, before its ability to dictate the market wanes further and before it invests even more money into diversifying its economy.

There are, of course, reasons that oil prices are falling that are beyond Riyadh's control. The United States, for example, has increased production—something it tends to do when prices reach producers’ break-even point in the $50 per barrel range.

Projections by the US Energy Information Administration (EIA) from late 2016 estimated that the US would produce 8.7 million barrels per day in 2017. The EIA has already begun to revise its forecast upward: New estimates suggest the country will produce 9.2 million barrels per day in 2017, and perhaps as much as 10 million barrels per day in 2018. If these rates continue, the US would produce more crude oil than Saudi Arabia would if it, too, maintained current rates.

Source: Geopolitical Futures

Russia’s Cuts

Then there is Russia, which has arguably misrepresented how closely it has adhered to the December agreement. This is because Russia simply can’t afford to cut production. Russian Energy Minister Alexander Novak has said Russia met its promised cuts of 300,000 barrels per day. Russian Energy Ministry statistics suggest that number may even be 400,000 barrels.

Source: Geopolitical Futures

But these numbers are misleading. Decreased production and intentional cuts aren’t the same thing. There was a similarly steep drop in Russian production—432,000 barrels per day—at this time in 2016, raising the question of whether this is just a monthly seasonal adjustment.

Crude oil production cuts are in the eye of the beholder. Russia has technically met its obligation to cut 300,000 barrels per day if the benchmark for the cuts is December 2016. Russia has not met its obligations, however, if the standard is a year-on-year comparison of cuts.

As the chart above shows, Russia raised crude production in January and March 2017 when compared with the previous year. The April 2017 decrease in production, when viewed year-on-year, is just over half of Russia’s commitment to OPEC.

The ebbs and flows of oil prices, for whatever their reasons, are best analyzed by oil experts. The bottom line is that there is more supply than demand, and when the price hits a certain point, US production begins to kick in, increasing supply and offsetting other cuts agreed to by OPEC and non-OPEC countries.

That puts a ceiling on the price of oil, putting countries such as Russia that depend on oil exports in a difficult situation. Moscow could afford a short-term production cut if cutting production put prices into the $70 and $80 per barrel range. But it could not afford a short-term cut that would close production facilities because of how dependent some regions in Russia are on oil.

A long-term production cut to keep the bottom from falling out of oil prices would also be difficult for Russia to maintain. After all, it’s already on pace to exhaust one of its reserve funds this year.

Forecasts on Track

With Russia unable to stomach even a short-term cut, the bulk of the responsibility for decreasing production has fallen to Saudi Arabia, which has a large but not-inexhaustible amount of money to cover losses.

The result is that Geopolitical Futures' 2017 forecast on Russia, which identified Russian aggressiveness abroad and political instability at home as the key drivers of Russia’s geopolitical situation in 2017, is on track. The same is true of GPF’s forecast on Saudi Arabia, which predicts that Saudi Arabia is standing on the brink of an existential political crisis that a Saudi Aramco IPO and a “Vision 2030” will not be able to avert.

OPEC bought itself some time with its agreement to cut production in December. But it now faces the difficult choice of ending those cuts and watching prices fall (an untenable choice for most OPEC and non-OPEC countries), or continuing those cuts to keep prices at their current levels—an increasingly difficult thing to guarantee, given producers’ history of adhering to OPEC agreements.

Sooner or later, the result is going to be lower oil prices, at which point many of the predictions that GPF made at the beginning of the year will begin to form more quickly.

Grab George Friedman's Exclusive eBook, The World Explained in Maps

The World Explained in Maps reveals the panorama of geopolitical landscapes influencing today's governments and global financial systems. Don't miss this chance to prepare for the year ahead with the straight facts about every major country’s and region's current geopolitical climate. You won't find political rhetoric or media hype here.

The World Explained in Maps is an essential guide for every investor as 2017 takes shape. Get your copy now—free!

John Mauldin Archive

© 2005-2019 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