OPEC’s Cuts Aren’t Working (Yet) Once the Oil PermaBulls realize they were sold a bill of goods, or they run out of money, the price will again drop to more rational levels. This will benefit the OPEC suppliers a bit, and the American supplies much. How cool is that? What the cut did not do is resolve the imbalance between supply and demand, or refill the coffers of the House of Saud, the OPEC cartel, or any of the other destitute, or near destitute energy producers. More below. "The Organization of the Petroleum Exporting Countries is cutting its output by 1.2 million bpd from Jan. 1 — its first such deal since 2008 — to prop up oil prices. “OPEC supply is on track to decrease by 900,000 bpd in January, suggesting a high level of compliance thus far into the production curtailment agreement,” Daniel Gerber, chief executive of Petro-Logistics, said in an email."
So, the OPEC cut is 900,000 bpd. What are the non-OPEC nations doing? "America’s oil output has risen more than 500,000 barrels per day since the beginning of October, a clear sign of the positive effect stable $50+ crude prices are having on shale producers. These U.S. firms will be pleased as punch to hear that OPEC is actually making the cuts it outlined two months ago, because to them, those lost barrels represent an opportunity to capture ceded market share in a better price environment. OPEC’s output reduction is greater than the corresponding increase in American oil output, so over time we can expect supply and demand to start to balance. But en route to that outcome, U.S. producers are going to gain a better toehold in the market, and even if the crude glut disappears, it’s hard to imagine prices will return to the high levels in which they existed for much of the beginning of the 21st century. This is the new oil market reality, and America is playing a major role in forming this new equilibrium." And this does not even take into account the other producers. Expect all of the non-OPEC oil producers to increase production as well. This will reduce the cut by even more. Also, the US producers have continued to find new, frequently huge oil reserves which all appear to be recoverable. Also, do not discount the fact that Trump is intending to open even more oil reserves to production. All of these things will likely shrink, or eliminate the cut. None of this addresses this issue from the demand side, and the evidence is strong that the self drive car, and semi truck will begin to reduce fuel use overall. I do not know where this ends, but I am not investing in the idea that oil will return to $100 bbl. and over time, I expect that the price of oil will continue to weaken.
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