• 4 hours British Utility Companies Brace For Major Reforms
  • 8 hours Montenegro A ‘Sweet Spot’ Of Untapped Oil, Gas In The Adriatic
  • 10 hours Rosneft CEO: Rising U.S. Shale A Downside Risk To Oil Prices
  • 11 hours Brazil Could Invite More Bids For Unsold Pre-Salt Oil Blocks
  • 12 hours OPEC/Non-OPEC Seek Consensus On Deal Before Nov Summit
  • 13 hours London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 14 hours Rosneft Signs $400M Deal With Kurdistan
  • 17 hours Kinder Morgan Warns About Trans Mountain Delays
  • 23 hours India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 1 day Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 1 day Russia, Saudis Team Up To Boost Fracking Tech
  • 2 days Conflicting News Spurs Doubt On Aramco IPO
  • 2 days Exxon Starts Production At New Refinery In Texas
  • 2 days Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 2 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 2 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 2 days China To Take 5% Of Rosneft’s Output In New Deal
  • 3 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 3 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 3 days VW Fails To Secure Critical Commodity For EVs
  • 3 days Enbridge Pipeline Expansion Finally Approved
  • 3 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 3 days OPEC Oil Deal Compliance Falls To 86%
  • 3 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 3 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 4 days Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes
  • 4 days EU Urges U.S. Congress To Protect Iran Nuclear Deal
  • 4 days Oil Rig Explosion In Louisiana Leaves 7 Injured, 1 Still Missing
  • 4 days Aramco Says No Plans To Shelve IPO
  • 6 days Trump Passes Iran Nuclear Deal Back to Congress
  • 6 days Texas Shutters More Coal-Fired Plants
  • 7 days Oil Trading Firm Expects Unprecedented U.S. Crude Exports
  • 7 days UK’s FCA Met With Aramco Prior To Proposing Listing Rule Change
  • 7 days Chevron Quits Australian Deepwater Oil Exploration
  • 7 days Europe Braces For End Of Iran Nuclear Deal
  • 7 days Renewable Energy Startup Powering Native American Protest Camp
  • 7 days Husky Energy Set To Restart Pipeline
  • 7 days Russia, Morocco Sign String Of Energy And Military Deals
  • 7 days Norway Looks To Cut Some Of Its Generous Tax Breaks For EVs
  • 8 days China Set To Continue Crude Oil Buying Spree, IEA Says
Alt Text

With A World Awash In Oil, Kazakhstan Faces Fuel Crisis

Kazakhstan is struggling with a…

Alt Text

The New Challenger To Lithium Batteries

The lithium-ion battery is head…

The OPEC Elixir Wasn’t Potent Enough

Rigs

Those new to financial markets, and energy trading in particular, were probably somewhat puzzled by the price action in oil futures this week following the announcement by OPEC and some influential non-OPEC nations that they are extending the production cuts agreed last year for another nine months, until the end of Q1 2018. The logical reaction to that news would have been a spike in oil, but instead we saw a dramatic decline of around five percent once the announcement was made. That is easily explained in terms of trading dynamics, but one question remains. Is it a sign that we are heading lower or does it represent a good short-term buying opportunity?

(Click to enlarge)

“But the rumor, sell the fact” patterns like this are extremely common, and are the logical result of declaring the intent to enact a policy before actually doing so. Various OPEC members have made it clear over the last couple of weeks that an agreement was coming, so traders inevitably positioned themselves for that in advance of any actual announcement. Those statements, however, also set the rumor mill grinding and the whispers began to assume that more was coming. The market began to price in deeper cuts, which were never indicated, and when they did not come the extension became a negative for oil. All those traders that had taken long positions rushed to get out, and the ensuing results can be seen on the chart. That proves a point that I have often made here, that market positioning and dynamics going into news releases are more important than the news itself, but when the longer-term implications of the news are considered the selling looks likely to be overdone.

There is no doubt that OPEC, even with Russia and the other signatories to the agreement, are not the power that they once were. However, they still account for around half of the world’s current oil production, and there was some other, highly significant news that came out of the meeting. It appears that contrary to the expectations of many the new quotas have been largely adhered to. If that continues to be the case, the massive stockpiles of oil that were the real cause of the collapse in oil prices and have continued to put downward pressure on them will be reduced over time. Demand for oil is still increasing around the world as the long, slow recovery from the recession picks up pace and static supply from half of the world’s production capacity is therefore effectively a significant cut. Related: Is The U.S. Getting Left Behind In The Renewable Race?

Of course, conventional wisdom states that all that will happen is that production in North America and other non-OPEC areas will increase to compensate for that. The shale revolution has certainly unleashed the capacity for that to happen, but assuming that it will ignores the fundamental driver of output decisions in those areas…the market. The drop in WTI back below $50 is hardly likely to spur a rash of new wells, regardless of the OPEC action.

The fact is that, in general, shale oil is more expensive to produce than the conventionally drilled oil that comes from the Middle East and other OPEC countries. By cutting the supply of relatively cheap oil, therefore, the agreement takes away output that cannot easily be replaced in the U.S. or Canada. That doesn’t mean that we are headed back to three-digit oil prices any time soon, but it does make the low to mid 50s look like the logical place for WTI to be. On that basis, a recovery to those levels from here, rather than any further decline, is only logical.

By Martin Tillier for Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment
  • Josh Gregner on May 29 2017 said:
    You write: "By cutting the supply of relatively cheap oil, therefore, the agreement takes away output that cannot easily be replaced in the U.S. or Canada. [...] it does make the low to mid 50s look like the logical place for WTI to be. On that basis, a recovery to those levels from here, rather than any further decline, is only logical."

    How so? I would agree with your logic if the world would be at average levels of oil stocks. But we have the US selling half of its SPR, China curtailing its demand, more shale than ever flooding the market and the Deal Maker of OPEC being out of his job due to a government change. Oh, and most important to all: I don't see any indications for demand to increase.

    At least near-term I don't see any reason to be bullish.

    Longer term we will need to see how much hedging the shale producers have done to keep their oil supply coming to market. Worst case for OPEC, the shale guys' hedging could mean a prolonged period of cheap price is all OPEC gets while shale has their revenues in the bag and thus won't curtail production. And by the time US shale has dried-up in a few years global demand for oil may have spiked already.

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News