Oil bulls run smack into reality once again

OPEC Cuts Not Expected to Change Much

More below.

The real price is lower, much lower.

"OPEC’s decision late this past month to cut production for the first time in eight years has so far had the desired effect: Brent crude has jumped nearly $10 per barrel, and that European benchmark and its U.S. counterpart—the West Texas Intermediate (WTI)—are now both firmly ensconced in the $50+ stratum.

But that’s still far from where OPEC’s member states—and the non-member petrostates it’s colluding with on this deal—would like to see prices. In fact, much of OPEC requires an oil price well in excess of $60 per barrel (and in some cases greater than $100) just to balance government budgets. So while this 20 percent jump in prices is a step in the right direction, it’s not far enough to bring the cartel to the ideal market its members are so desperately hoping for.

The billion-dollar question, then, is just how effective this cut can be in reducing the global glut of crude—and therefore how far it can inflate prices. Unfortunately for the Saudis and their ilk, according the U.S. Energy Information Administration (EIA), prices won’t be moving out of the $50 range next year."

Since the world is more likely to fall further into recession, and unlikely to move into growth, the price will need to be lower. Add to that the American ability to innovate ways to extract oil at lower costs, and there is a real danger of Americans increasing production into the teeth of an economic decline because they can still make money. 

"Those forecasts for those two important benchmarks for next year are actually lower than where Brent and the WTI currently reside. We should note that oil market forecasts are notoriously unreliable, for the simple reason that any number of events, foreseeable and unforeseeable, could jerk prices in one direction or another. That said, the fact that the EIA is anticipating such a mild medium-term effect of OPEC’s cut on the market should be deeply worrying to petrostate oil ministers the world over.

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This was always the biggest weakness of any decision by OPEC to constrain supplies in an effort to counteract sliding prices these past two and a half years. And it’s precisely why the Saudis held out against supporting a cut for so long. Desperation, however, forced Riyadh’s hand, and now OPEC looks set to cede market share without fully capitalizing on rising prices. For those petrostates, this is the worst-case scenario. For American shale producers, however, it’s starting to feel like a boom once again."

The House of Saud brought this upon itself with its hubris. It has chosen the form of its destructor.