Will OPEC Be Turkeys Again?

Last year, while we Americans were busy overindulging on turkey and all the fixings, OPEC ministers pulled a fast one on us. While we innocently watched football and took naps, the price of WTI crude plummeted from $74 to $68 in response to OPEC’s announcement it would leave its oil production target unchanged at 30 million barrels per day (mb/d).

Until that weekend, oil in the $60s or $70s seemed unsustainably low.

Of course, even before OPEC’s big Turkey Day declaration, oil had already fallen about 30% from its June highs of $107, due to burgeoning supplies. But the summer swoon turned out to be just the warmup for the rest of oil’s big 17-month collapse (so far). OPEC’s Thanksgiving 2014 meeting sent prices reeling and continued pressures have kept crude near its lows (around $40) even today.

Year-over-year OPEC production GROWTH

Since OPEC’s Thanksgiving 2014 bombshell, OPEC’s y-o-y (or t-o-t, if I may… turkey-over-turkey) production has not only held the 30 mb/d level, but has actually spiked strongly upward to 32 mb/d! And these increases have come despite lower and lower prices! Those turkeys!

OPEC’s surprise 2.0 million barrel production increase has come predominantly from Iraq (about 1,000,000) and Saudi Arabia (about 800,000). The gains have come despite Libya remaining mostly offline, with its 400,000 mb/d potential.

No doubt, Iran will soon add even more barrels to the glut, to the tune of possibly 500-600,000 mb/day in 1st half 2016 (and potentially even more later).

So what’s the cartel up to this Thanksgiving?

The next OPEC meeting will take place on December 4th, in Vienna. In the meantime, various OPEC players are displaying noteworthy antics this week. Feast your eyes on these:

• Russian President Vladimir Putin traveled to Tehran on Monday for an oil summit and talks Iranian President Hassan Rouhani, Venezuelan President Nicolas Maduro, and others. Putin also met with Iran’s Supreme Leader Ayatollah Ali Khamenei on the trip, just hours before Turkey shot down a Russian jet that allegedly refused to leave its airspace.

• Venezuela’s Oil Minister Eulogio Del Pino is jawboning that oil may need to drop into the mid-20s unless OPEC takes action. Del Pino further suggests OPEC set a price target, like $88. All this is according to Bloomberg.

• Saudi Arabia released two separate statements acknowledging the Kingdom’s “role” in the oil market’s “stability,” leading some to extrapolate that the Saudis may finally be willing to cut production in order to prop up prices, according to this CNBC article. Oil prices moved upward for part of Monday, reportedly based on these comments. However, the Saudis have used similar language throughout the last year and a half.

• Iran’s oil minister said Monday he doubts OPEC has the will to act as a group to support oil prices, according to CNBC.

But these anecdotes really aren’t merely antics or positioning statements. Real dissention exists between the less wealthy OPEC producers – countries like Nigeria, Algeria, Venezuela, etc. – and the cartel’s wealthy leading countries like Saudi Arabia. All OPEC countries are struggling with today’s lower prices to some degree; but the Saudis continue to emphasize that cutting production will only cede market share to Americans, Russians, and others.

OPEC ain’t what it used to be

Of course, the real story is OPEC’s lost relevance. Between OPEC’s internal disagreements and US shale companies’ newfound status as swing producers, the cartel no longer has the price-setting power it once enjoyed. In fact, since the North American industry is made up of hundreds of independent firms pursuing their own self-interest, oil markets are now more than ever just that – markets!

CNBC news editor Patti Domm reported on Monday, “Comments from Saudi Arabian officials stirred speculation OPEC could be considering abandoning its market-based pricing strategy, but the cartel is unlikely to change policy and it heads into next week's meeting less relevant than ever.”

Which way will oil prices go?

So many factors influence oil prices now, rendering future crude price predictions an impossible task.

On the supply side, weekly data on rig counts, inventory, and other production statistics regularly whipsaw the market. OPEC and non-OPEC countries make and execute individual decisions based on their own calculations. Hundreds of shale producers can now quickly ramp up supply any time they (individually) decide prices justify increased activity. Seemingly, any head fake towards higher prices would usher in a new glut of oil from various wells around the globe.

Yet then again, capex on new equipment has dropped off dramatically (and is projected to continue falling), must place some limits on the volume of “shadow inventory” that can be quickly brought online – at least in the very near term.

On the other hand, what if Russia decides to blow up enough oil (belonging to ISIS and others in the Middle East) to impact supplies? Or what if some other geopolitical event severely disrupts supplies?

What if Iran and Libya bring more oil to market than expected? What if central bank policy results in another sudden dollar spike, similar to 2014’s?

What if refineries shut down, have an accident, or conversely, work through excess inventory more quickly than expected?

On the demand side, how will China’s slowing growth affect oil? What about China’s planned shift towards a services-based economy? And what about global growth, for that matter? How much oil reserves will China add, or will the US sell?

The bottom line, of course, is that (like any market), prices themselves represent the best available information. Market price takes into account all of the above factors and more. Prices move on the dynamic gap between expectations and reality, for both supply and demand.

And what are prices saying now? Listen closely over the next several days. Monday and Tuesday are bringing higher prices so far. But as of Tuesday morning, MarketClub still shows 3 red triangles for January WTI crude futures – signaling more possible downside from here. Supply seems to remain firmly in control.

Best,
Adam Feik
INO.com Contributor - Energies

Disclosure: At the time of post publication, this contributor owned Enterprise Product Partners (EDP), but did not own any other stock mentioned. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.