How To Trade OPEC’s Production Boost

I've been waiting for the last minute to write this column, waiting on the decision of OPEC in Vienna this morning. While the final decision isn't official, it seems that the cartel has agreed to a graduated 1m barrel a day increase, which will deliver a real 600,000 barrels a day more into the global marketplace.

This will be viewed as a victory for the Saudis - and a very bullish sign for oil and oil stocks.

It still remains to be seen whether the Russians will agree to this proposal, but my thesis all along was that the Saudis were much more willing to deliver much of the proposed increase to the Russians in order to keep the OPEC and non-OPEC deal together. And I am convinced that they wouldn't have even begun to negotiate with Iran on a 600k increase without knowing that they could get the Russians to go along with the deal first.

In terms of the global supply chain for oil, 600,000 barrels a day does not make up nearly for the shortfall from Venezuela, let alone the coming shortfalls from increased sanctions against Iran, the continued strife in Nigeria and Libya and finally, the coming infrastructure bottleneck that's already limiting flow in the Permian basin.

We've been very clear that this was the strongest bullish case for oil going forward, and another indication that U.S. shale oil supply is far from being capable of responding quickly to supply changes - indeed, proving again the subtitle of my last book on shale oil "The Myth of Saudi America".

Scott Sheffield has been recently very vocal about the difficulties that his company and the Permian at large is seeing in pipeline capacity, indicating that the throughput of Permian pipes will be completely allotted by September, forcing rig shutdowns and making a mockery of the EIA projections for production growth for 2018.

As it becomes clear that U.S. supply will not increase to the degree that virtually every analyst has forecast, there will be further worry about global supply and another, far more intense spike in prices.

And here we have again an opportunity to be in front of this spike that can likely take oil well above $80 a barrel in Brent, and above $70 for our own benchmark West Texas Intermediate.

The best opportunities will continue to be in those shale plays that do not specialize in the Permian, where those basis discounts from throughput shortages will only get worse - it will also benefit more those producers that are less hedged for their production for the rest of 2018 and into the first half of 2019.

And here, Continental Resources (CLR) again becomes an obvious choice, with its Bakken acreage and CEO Harold Hamm - who has always been willing to keep his chips on the table and take his chances on oil prices, refusing to hedge his production for the most part, both through good times and bad. Other obvious names worth exploring include Hess (HES) and EOG Resources (EOG), who have flexibility outside of the Permian with their Eagle Ford acreage. More speculative names include Marathon Oil (MRO) and even Whiting Resources (WLL), who after their 1 for 4 split might have even more room to run.

The only further hurdle on the horizon that might stop this freight train for oil is President Trump's unnecessary trade war he's beginning with both Europe and China. We'll have to see where that goes.