OPEC Sticks to Its Guns – And Higher Oil Prices Persist

Despite the best efforts of a miserable monthly U.S. employment number, some disquieting economic data from Europe and China, and a presidential bully pulpit, crude oil prices continue to rise.

I discussed the paltry 20,000 job gain in the last Oil & Energy Investor (“One Employment Report Does Not a Trend Make,” March 12, 2019). Also in that column, I noted the decision by the European Central Bank to cut its growth estimates for the continent, while Beijing posted declines in both exports and imports in February.

Of course, the Chinese picture was more than offset by a surge in oil imports – February had the third highest monthly figure on record.

As for the presidential pressure (usually found in early morning tweets), Trump has attempted in every way to browbeat OPEC into expanding production, thereby increasing the volume in the market and (in theory at least) reducing price for refined products.

And yet all this hitting at the same time has failed to stop an oil rise.

U.S. crude oil benchmark, West Texas Intermediate (WTI), closed yesterday at $58.26 a barrel, up 2.4% for the session and an expanding 9.7% for the month.

Similarly, London benchmark, Brent, posted a price of $67.63, better by 1.4% and 8.5%, respectively.

I have some ideas about this trend…

U.S. Production Remains a Major Factor

One reason for the upward trend is more balanced U.S. production.

The usual quick-read by experts in the industry is to equate higher-than-expected numbers in crude supply figures released weekly by the U.S. Energy Information Administration (EIA) as a surplus leading to a decline in price.

Some of this, of course, is a basic application of supply and demand. But it hardly takes much to prompt the talking heads on TV to start worrying about American shale oil drowning out the market with excess extraction.

That it does not is an exercise of some market restraint by the operating companies. The EIA figures yesterday showed a weekly decline of almost 4 million barrels.

At current prices, most companies can be profitable without having to resort to maximum drilling.

That’s quite different from the panic of several years ago, when prices plummeted to below $30 a barrel. Then, whatever a company could lift was released on the market, often done one step ahead of an outright default.

Still, there will from time to time be spikes in American production. Much of this is moving into exports.

This limits the overall impact on WTI prices as the U.S. crude moves to foreign markets, where demand is accelerating.

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The limit to this drain off remains the aggregate port and infrastructure capacity for export increases. That may comprise a short-term ceiling until additional facilities become operational in Corpus Christi and other locations down the coast from Houston and the Channel.

With WTI prices approaching $60, U.S. companies know that having extractable reserves does not mean they must be drilled. In fact, leaving these reserves in the ground, especially in an environment of rising oil prices, usually translates into higher stock values for publicly traded companies.

However, unquestionably the main stimulus to providing a rising floor for oil prices are the cuts implemented by OPEC members (led by Saudis Arabia) and by primary non-OPEC countries (led by Russia).

My side bar meetings with OPEC member country and Russian ambassadors at the recently concluded energy consultation at Windsor Castle attest that these cuts are going to be staying for a while.

Now, there is anecdotal evidence that Moscow may be wavering on its support for continuing its commitment.

But Riyadh is taking up any slack with increasing Saudi declines in production beyond what has already been agreed to. To a lesser extent, the United Arab Emirates and Kuwait are on board in expanding their own cuts.

And then there remains the basket case known as Venezuela…

Geopolitics Strikes Again – In America’s Favor

Once the second-largest OPEC producer after Saudi Arabia, Venezuela is now imploding.

State oil company PDVSA is unable to arrest a virtual freefall in production rates. Hard data are increasingly difficult to come by, but my sources attest that levels have now fallen well below a million barrels a day – the lowest level in at least forty years.

And there are no prospects that this crisis will attenuate anytime soon.

The political situation in Caracas is bedlam, basic services are gone, food is increasingly unavailable, daily life has recently been disrupted during a days-long blackout, and the nation is “governed” by two presidents – one elected in a fraudulent election, the other installed constitutionally by the national legislature.

Then there are the Iranian sanctions.

Trump suspended their effect at the last minute back in November by 180-day exemptions for the eight main importers of Iranian crude.

Iranian production nonetheless has been declining – and the sanctions will have to be applied in early May or Washington loses all credibility on the issue.

The Venezuelan and Iranian situations, combined with ongoing problems of sustainable production in war torn Libya, civil strife in Nigeria (both OPEC members), and stubborn problems limiting increases in non-OPEC Mexico, provides flexibility for others to begin increasing their production without actually adding to overall global market volume.

That allows OPEC to stick to its guns on “restraining” production, thereby improving price, while at the same time increasing revenue. And American producers are also benefitting from the leverage in the current market.

Meanwhile, prices of oil products will slowly rise.

And there is nothing a presidential tweet can do about any of it.

Sincerely,

Kent

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