In financial markets, very few things are predictable; if they were we would all be fabulously wealthy. Some things, though, definitely fall in the category of “extremely likely”. A couple of weeks ago, in a regular webinar for Energy Trader Team members, I said that, while the fundamentals for oil still looked terrible, I expected something to happen over the next few weeks that would push oil higher, maybe even back to the $50 level.
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Sure enough, that thing happened yesterday and triggered a roughly 5 percent one day spike in WTI, a move up that is continuing so far today. It was not anything concrete like a dramatic fall in inventories: in fact the big red bar for two days ago indicates the release of that data, which showed another larger than expected build. No, what set the market ablaze was a prominent OPEC member using the oldest trick there is…talking his book.
Khalid al-Falih, the Saudi Arabian Energy Minister, talking about an informal meeting of OPEC countries in Algeria in late September, said that member countries would discuss the market situation at that meeting, including any actions that could be taken to stabilize prices. It is a strong testament to the power of hope that those comments caused such a spike in oil. What al-Falih actually did was state the obvious. I mean, what else would a gathering of OPEC ministers talk about…the price of fish?
That doesn’t mean though that energy investors should see this as a flash in the pan. I will be dipping a toe back into E&P stocks over the next few days as well as maintaining a generally bullish stance for oil trading, as I expect this to be just the first shot in a sustained book-talking campaign. The Saudi’s, after all, are the people who have stymied previous attempts by other OPEC members to cut, or at least cap, supply. Just last week we learned that the Saudi June crude production hit yet another record.
The reasons for that are strategic and have been discussed in detail elsewhere, but it comes down to two things. First, the Saudis want to flood the market in order to retain market share as their enemies, the Iranians, rejoin the market after sanctions were lifted. In addition, keeping prices low in the long run forces some of the U.S. fracking firms out of business and closes the less cost effective unconventional wells around the world.
That all makes sense for the Saudis, but other OPEC member countries are hurting. In order to hold the cartel together, a little talk from the Saudis is a small price to pay. I don’t think it will actually result in any action come September, but it is reasonable to expect other countries that actually want some action join in the talk. That is exactly what we saw in the run up to the last full OPEC meeting in June, and the talk started early then too, with chatter in April.
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As Mark Twain once said history doesn’t repeat itself, but it often rhymes. The fact that a campaign of words gained temporary relief for other OPEC members the last time it was used, while still enabling the Saudis’ long term strategy, suggests that those tactics will be used again. Traders may be aware of what is going on to some extent, but as algorithms and funds react to the words shorts will be squeezed and momentum will take over, and that, as we saw last time, can be a powerful combination. So, position yourself for it and let the talking begin!