• COMMENTARY: The Next Move in Oil Is up to OPEC

    On the 25th of May, two vital events will occur: first, OPEC will be meeting to decide what to do about oil production, and the second and most important event will be my 49th wedding anniversary.  The anniversary will be between my wife and me, so here I will concentrate on the OPEC meeting.

    OPEC decided last fall that after the first of the year, they were going to cut the production of crude oil to reduce the global oversupply. Their hope was that reducing the supply would allow prices to rise. So the question is, “How did things turn out for them?” The current benchmark price is $46.43, down from its most recent high of just under $54.00 a barrel. The chart below shows the volatility of the price and why this current price of crude is important.  With OPEC meeting in two weeks, this price level is dangerous, both to the price of oil and to stock markets around the world.

     In advance of OPEC meetings, I have written three articles, and I believe that I have correctly called the direction of crude oil prices each time. OPEC cannot have any chance of survival, even at $46.00 a barrel, so at the May 25 meeting, look for OPEC to call for more production cuts to further try to boost the price of oil. If the cartel abandons any production cuts, then look for the cartel to unwind, and then it is every man for himself. If this happens, crude oil could retest the lows.

    A retest of the lows in crude will be the end of OPEC as a cartel. Yes, there will be many discussions on how to put the genie back in the bottle so that OPEC can have some measure of control over oil prices. The bottom line, though, is that the United States will be the new leader of world oil production and prices.

    OPEC said that it would reduce production by 1.8 million barrels a day, but over the first quarter, the International Energy Agency (IEA) said supply was still out-stripping demand, so something has to happen at the May meeting.

    If I’m right that OPEC will suggest further cuts between 500,000 to 750,000 barrels a day, the price will move higher and then the markets will see if OPEC production cuts are sustainable.

    I think some investors have shorted the oil market as a way to force OPEC to reduce production. Because OPEC nations are so dependent on oil revenue to pay their bills, lower production will put enormous pressure on their governments just to placate their citizens. Unless prices rise by the percentage of the expected production cuts, all OPEC nations will have less to spend. Most importantly, they will need almost all of their revenue diverted to government operations, and will have less money to fund new sources of energy and maintain existing infrastructure.

    This past year was the first full year in which America exported crude. One year ago there were 354 rigs drilling in the United States, the lowest level since the 1940’s. Today, 12 months later, America has 865 rigs drilling for oil and natural gas. According to Statista, the energy sector of the economy represents only 6% of American GDP. On the other hand, in many OPEC nations, energy can represent 65% or more of their GDP.

    By OPEC cutting its production, American oil companies will have an opportunity to take market share from both OPEC members and Russia. Oil is now an American weapon. Currently, America is exporting daily over 1 million barrels of crude, 1.2 million barrels of diesel fuel, and 700,000 barrels of gasoline, and look for it to go higher.

    In a previous blog, I suggested that OPEC is in a death spiral and still hasn’t figured out that it is no longer in charge and that it has no power. If as a last stand OPEC refuses to cut production at the May meeting, then global stock markets will be in for a steep fall. You will see a rise in the value of the dollar and US interest rates will fall, because of demand for a safe place to hide.

    I’m afraid there is no positive outcome to OPEC’s pending decision. Recently, when a friend asked me what I thought would happen, I told him, “In 1930 we took a nation of nomads and turned them into westerners, due to the wealth created by oil exploitation. I’m afraid that we may well return them to a nomadic life, and there will be a very high human cost in the war to come.”

    Dan Perkins

    Dan Perkins is a novelist who has written a trilogy on a terrorist attack against the United States. The Brotherhood of the Red Nile series is available at Amazon.com. Mr. Perkins book web site is www.danperkins.guru.

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