Dr. Kent Moors
The market is anxiously awaitingtoday’s OPEC meeting at its Secretariat headquarters in Vienna.
But I’m not.
We have a virtual guarantee that the policy to extend the cap/cut in production will continue.
But that’s not the real issue.
The combination of analyst angst prior to such a continuation and the slowly building production levels among U.S. operators is providing a short-term pause in the rise of oil prices.
Even with the 1.6% pullback over the past two trading sessions, WTI (West Texas Intermediate, the benchmark crude rate for futures contracts cut in New York) is still up by more than 2% for the week and a hefty 7.2% for the month.
In short, there is little genuine risk of a cascading pricing curve setting in because there are simply no underlying factors to justify such a move.
But volatility in a rather narrow range remains a possibility.
Nonetheless, today’s extension will not be entirely good news.
In fact, my sources just handed me a bit of information that will set the stage for a major confrontation in 2018…
How Long Will OPEC’s Latest Move Last?
According to my sources, the impending cap/cut production extension will only be for six months, not the full year most market observers would have preferred.
That could spell trouble in the latter half of 2018.
That’s because as the floor of the oil pricing band has risen, so has the pressure for additional volume.
At WTI prices of about $58 a barrel, much of the production sector can make a profit (especially in the United States).
However, the truth is it’s never been about having suspect reserves.
There are considerable amounts of excess oil that is rather easily recoverable.
Supply and demand dynamics take over at this point.
This CouldCreate “The New OPEC”: One gallon of this new fuel could produce enough energy to power a car for 42,325 miles. It’s being hailed by many experts as the “Holy Grail” of energy breakthroughs, and it could make early investors huge short-term gains. Read more
The excess nature of what operating reservoirs contain serve as only a modest cap on prices. Unless, of course, the prospects increase enough that the additional largess will be lifted and moved into the market.
Some of that is happening now.
However, the American operating environment has thinned out after a wave of mergers and acquisitions (M&A) along with flat-out bankruptcies.
The oil patch companies remaining aren’t necessarily those desperately pumping one-step ahead of the sheriff while shouldering unsustainable mountains of debt.
Rather, the players are largely those who can entertain a more realistic balance.
A Delicate Balancing Act
Oil prices remain determined globally, not locally.
The rising impact of U.S. exports into higher-priced foreign markets will accentuate some of the pricing pressure, but will also provide a welcome balancing between domestic and foreign supply.
The aggregate nature of supply within OPEC is also undergoing some changes.
As I have noted on several occasions, the implosion in production by Venezuelan national oil company PDVSA (having, at least on book, the largest extractable reserves in the world) combined with persistent problems in Libya, Nigeria, and Angola means there is additional room for production beyond quota for other members.
That allows for a greater amount of leverage than might otherwise be the case.
Some OPEC countries can effectively “cheat” without the excess production adversely influencing the wider market price.
On the other hand, a major disquieting matter needs tending after today’s meeting:Russia…
Join the conversation. Click here to jump to comments…
Dr. Kent Moors
About the Author
Browse Dr. Kent’s articles | View Dr. Kent’s research services
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.
… Read full bio