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Alt Text

Is OPEC Deal Compliance About To Crash?

OPEC’s victory lap to celebrate…

Leonard Brecken

Leonard Brecken

Leonard is a former portfolio manager and principal at Brecken Capital LLC, a hedge fund focused on domestic equities. You can reach Leonard on Twitter.

More Info

OPEC Struggling To Keep Up The Pace In Oil Price War

OPEC Struggling To Keep Up The Pace In Oil Price War

 Some market watchers, such as Cornerstone Analytics (CA), have consistently stated that the underestimation of demand, coupled with over-estimation of supply, will mask the growing call on OPEC oil in the second half of this year. CA recently noted that global demand outstripped supply by some 4 million barrels in April . This comes in addition to the mounting evidence that the oil market, via rig count declines, slowing production growth, higher demand and huge API crude inventory declines, is starting to readjust.

Be that as it may, Goldman Sachs (GS) seems to believe oil must fall to $45 by October (like it previously thought $30 oil was a certainty) to clear the market and rebalance, despite signs that a readjustment is already underway. When was the last time fundaments got ignored and prices went in opposite direction? As an aside, take a look at the S&P 500 vs. GDP growth, as one makes new highs while the other falls from 3.0 percent growth to under 1 percent so far this year! Related: Goldman Sachs Predicting $45 Oil By October

In other words, asset prices continue to be set by central bankers, and not free markets, so the GS call does make sense if you believe fundamentals don’t matter at all. Still, they should be discussed either way. Rather than being based on the fundamentals, GS, like others, have consistently been off the mark when it comes to oil prices, but refuse to acknowledge it (the agenda at GS has been exposed via Zerohedge). Multiple calls just this week for $45, on top of other economic research, clearly reveal this. Related: $50 Billion Mega Project Could Change South America Forever

I will be first to admit that I thought oil prices short term would peak in $60s and $70s, but I never thought they would retest the lows. Why should they, if all the trends point to markets slowly rebalancing? In fact, there is growing evidence that not only are we slowly rebalancing but the world may actually be running short of oil. According to Reuters, Saudi Arabia has turned down requests from China for more oil, as they are using it for their own domestic refining needs. It goes on to quote: “[a]nother source with a Chinese refinery that takes Saudi oil said Saudi heavy crude was ‘a bit tight’ in May and June.” China was forced to turn to Russia, Oman, and other non-OPEC nations for their needed supply. Why would Saudi Arabia refuse to supply China unless oil was, in fact, tight? Related: This Innovation Will Help U.S. Companies Win The Oil Price War

This provides the strongest indication yet that the world is not facing a 2 million barrel-per-day surplus in supply, as many allege, and instead the call on OPEC crude is most likely growing. The latest EIA weekly inventory data showing a drawdown of 2.7 million barrels reaffirms that the US is no longer oversupplied either.

Finally, just to reinforce the point, oil companies indicated during some of their first quarter 2015 earnings calls that rigs could begin to be added back into operation when prices reach somewhere in the neighborhood of $70 per barrel. Quite frankly, producers shoot themselves in the foot by providing a set price, which, I believe, affects how oil is traded. GS and everyone else are using that guidance on trading oil. But to be clear, we know for sure rigs won’t be added at $50, never mind $45. Once you factor in the natural depletion of existing wells, production will have to eventually go down – another reason why the GS call will be wrong.

By Leonard Brecken of Oilprice.com

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  • Brian B. on May 20 2015 said:
    I agree. Oil is much tighter then many of us realize. Clearly, if Saudi Arabia is turning China down for more, then clearly something is afoot. We have had three weeks in a row of fairly decent size draw downs in our oil stockpiles here in the U.S. and now for the first time, we have had a reasonably major cut in domestic production of 112,000 bpd (equivalent to 784,000 barrels in a week), albeit, it was from Alaska. The Lower 48 oil production was steady again this past week. With todays decline in domestic production, we now have trimmed off exactly 160,000 bpd (cumulative) from domestic production since the week of March 27th. Although, it seems that the production in the lower 48 has leveled off, I think that is only temporary, and I believe that production in the lower 48 will start to decline again here soon (June and July), and that we will start to see some rather large declines in the lower 48. If Cornerstone Analytics is correct and global demand outstripped supply by some 4 million barrels in April, then that, in conjunction with the lowering U.S. production, could cause oil to rebound nicely here this summer. A lot of this hinges on the lower 48 domestic production. Next weeks EIA report will be highly anticipated, as always!
  • Mike Dedmonton on May 20 2015 said:
    Guess some companies were not able to sell their long positions yet.

    Another puff article.
  • Mary on May 21 2015 said:
    "thought $30 oil was a certainty"

    You may be right, but making stuff up is hardly the way to argue. They didn't say it was a certainty, they said it "could" reach as low as $30. Goldman's horrific track doesn't need to be exaggerated.
  • Rich on May 21 2015 said:
    Nice article.

    GS, in my opinion, is completely wrong in their $45 barrel oil call. If supply is already in draw down and with natural depletion of 4% a year And with rigs still being pulled from the market (less supply) this is going to cause prices to go UP. Since, there is LESS supply being added to the market (from natural depletion and pullback in rigs) That Means prices will only go up.

    I strongly believe that oil rigs will not come back in a meaningful way until oil hits $70 but until then Oil reserves will quickly fall since supply has been drastically cut and the world is using more and more oil every year.
  • Rick on May 22 2015 said:
    Hey Mike, if you're going to label people, why don't you admit you're a frustrated short scrambling to cover. Leonard is only pointing out things that are mostly being ignored. Production in Texas and North Dakota plateaued last December. Go check the ACTUAL data, not EIA model based data. If Cornerstone is correct, oil finally may show a solid recovery. What are you Mike, a partner at Goldman?
  • rbblum on May 23 2015 said:
    Surely Venezuelans could participate in the great illegal migration to the United States. . . . as should the dwellers of the Brazilian shantytown. . . since US taxpayer benefits are guaranteed.
  • Jimmy on May 25 2015 said:
    Of course...OPEC and Russia have been having lengthy talks of late.
    Perhaps this is some of the fruit that came from those talks.
    If OPEC dropped their storage to supply China, then the oil price may go up and allow the Shale plays to become more profitable.
    This may be part of the plan to keep market share. While this allows Russia to make some money it keeps the US Shale companies less profitable so they won't fire up again.
  • Jacob on May 30 2015 said:
    You forgot about one important thing when you mentioned that the demand for oil is growing. It's growing because of the summer season. Saudi Arabia and Iraq are boosting their production to keep the prices as low as possible during the summer. Things will turn bad in October and November. Prices will drop again next week as Opec members have meeting in Vienna and we all know what the result of that meeting will be :)

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