Irrational Oil Prices | Russell T. Rudy Energy LLC
In what appears to be a trend on “Oil Voice”, the website recently posted an article which contends that facts no longer matter in the global oil market. In the article, author John Richardson makes the case that the fundamentals of supply and demand have now been supplanted by emotion and spin management in determining oil prices.
Richards cites a recent report by the International Energy Agency which found that OPEC produced a record 33.6 million barrels of oil per day (Mbopd) in September, Russia hit a post-Soviet record, and global demand is slowing. It is at these elevated production levels that OPEC and Russia are beginning to consider a freeze.
Even when OPEC agreed in Algiers last month to modestly cut output, this is merely an agreement in principle. Now the real work begins. Members will have to determine which countries will get to produce what volumes and when these quotas go into effect. Admittedly, the cartel agreed to limit production to 32.5-33 Mbopd but there is no agreement as to effective date. Further, Iran, Libya and Nigeria all expect to increase production from current levels and think they are exempt from any reductions in output. If this is the case, even bigger cutbacks will be required by Saudi Arabia and the other members. Supposedly, all of this will be worked out at the next meeting on November 30.
Of course, U. S. shale operators are exempt from any OPEC quotas. Rather, they are continuously forcing down break-even costs for domestic projects, which means they will likely produce more. Consequently, Goldman Sachs is predicting that domestic crude output will increase by .6-.7 Mbopd by the end of 2017. Shale operators have already hedged future production at record levels to lock in the recent run-up to $50 per barrel. This will enhance liquidity and provide funds for further production expansion.
Richardson contends that the U. S. Federal Reserve lowered interest rates to artificially low levels in response to the Global Financial Crisis. Institutional investors (hedge funds, pension funds, life insurance companies, etc.) then realized they could no longer generate acceptable returns in real dollars from bank deposits or U. S. Treasuries. Alternatively, this avalanche of cheap money from the Fed was used for speculation in commodity futures such as oil.
The author believes that at this point emotion and spin management replaced long-term supply and demand fundamentals as the driving forces in the global oil market. He states “…the only thing that has really mattered since then has been the ability to sell a story, however spurious, for long enough to make money from a rally or dip in crude prices.”
Richardson sees the news of an OPEC freeze/cutback, supported by Russian co-operation, as the driver behind the recent increase to $50 per barrel. When this proves unsupported by market fundamentals, investors will unload their futures contracts quickly enough to lock in a profit and drive prices down further with rumors of discord among the parties.
To read the article in its entirety, please go to http://www.oilvoice.com/n/Oil-Prices-When-The-Facts-Dont-Matter/f155644101c2.aspx .
Russell T. Rudy Energy, LLC buys oil, gas and mineral interests nationwide. Please call (800-880-0940), or write (info@rudyenergy.com ) to let us know if you agree, disagree or would just like to comment on this, or any of our posts.
