Back to Basics | Russell T. Rudy Energy LLC
Many energy observers were confounded when OPEC, Russia and 10 other nations (N/OPEC) announced the extension of oil production cutbacks, and prices fell. While this indeed seems counter intuitive, in a recent article in “Oil Voice” entitled “OPEC Extends Cuts, Oil Prices Fall: What it Means”, Art Berman offers his explanation.
Berman has long contended that given current production, inventory, and consumption (basically supply and demand) levels, market fundamentals support a price of $45. Prices might occasionally spike above this when N/OPEC makes announcements that encourage price bulls to take action. However, Berman calls these spikes the “OPEC Expectation Premium” and considers them unfounded and unsustainable.
Since productions appears stable, (N/OPEC cuts are being offset by increased domestic shale oil production), and consumption is increasing only modestly at best, the remaining variable is inventory. Consequently, when N/OPEC announced an extension of production quotas at current levels, this was basically an endorsement of the status quo. However, the markets wanted deeper cuts, and when they did not materialize, traders unloaded oil futures.
Markets focus on the near term, but OPEC takes the long view. OPEC is a loose confederation of unique nations with different needs and interests. The only cohesive rationale for cooperation is maximizing revenues and minimizing losses. According to the International Energy Agency, the cartel has already increased revenues by $75 million per day as a result of the production cutbacks. Further, deeper cuts in production would only transfer market share to competitors and result in no net benefit to OPEC.
Berman goes on to details how OPEC has repeatedly taken action to establish a price floor at various points since the price collapse of 2014. Finally, in November of last year OPEC and its allies actually enacted production cuts and the price floor moved almost 75% from $26 to $45 per barrel in just over a year. Berman concludes that the intention of the announced extension of production cutbacks last week was “To reinforce the current $45 floor without helping the competition too much-not to meet market expectations of higher prices.”
To read the article in its entirety, please go to https://oilvoice.com/Opinion/5209/OPEC-Extends-Cuts-Oil-Prices-Fall-What-It-Means?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OilvoiceHeadlines+%28OilVoice+Headlines%29 .
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