With each passing day there is another indication that OPEC has struck a deal to limit production in an effort to raise the price of oil from its current mid-$40 a barrel range. Usually these announcements rest upon the Saudis, Iranians, Iraqis or other member-states wanting to keep market share while raising prices to assist their floundering economies, or war-torn countries. These are some of the factors that have caused recent attempts at limiting production to fail.
What is never taken into account are balance sheets, profit and losses, to drill or expand, and whether or not there is sufficient demand for additional barrels of oil to reach world markets. Further, no one seems to be asking what to do with Chinese debt bubbles, and abundant supplies of crude sitting in storage around the world.
The laws of supply and demand, and international finance have taken a back seat to the whims of OPEC members who can’t agree on production limits. Even recent announcements indicate OPEC is still drilling, pumping and exporting oil at a record pace. But why has it reached this point?
Simply put, the Saudis and Iranians deep dislike and distrtust for each other is one of the larger reasons OPEC can’t agree on production limits and price adjustments. And while OPEC has managed to produce documents that outline strategy, until the Saudi-Iranian rift is solved it is hard to imagine anything else will matter regarding OPEC relevancy for production limits. The Russians not agreeing to cut production is important, but the Saudi-Iranian rift has deeper implications. Related: Surging M&A Activity Suggests The Worst Is Over For Oil
What was lost in the agreeing document was the Iranians balking at limiting production. The Iranians were seen as holding up real production cuts after years of crippling sanctions were recently lifted after the P5+1 agreement. Without the Iranians, the upcoming OPEC meeting in Vienna will not move oil into the $60 a barrel range that countries such as the Saudi Arabia, Russia, Libya and Venezuela desperately want.
With all of these challenges, and scuttlebutt of an OPEC implosion, where do investors go for solace and an understanding of where oil and gas markets are headed moving forward?
A few points for investors to remember – OPEC and the fossil fuel markets – aren’t going anywhere, anytime soon. With over 6,000 products connected to petroleum, only the misinformed see oil markets dissolving in the near future. And with regards to OPEC, while not being as effective as they were in the past, and even with the Saudi-Iranian infighting going on, the cartel will still be producing around 40 percent of the world’s oil supply. The era of peak oil never really began, and with real savings going into consumer’s pockets worldwide, renewables will grow, but oil and gas are here to stay for decades.
By Todd Royal for Oilprice.com
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