OPEC’s Magic Moment

OPEC’s Magic Moment

This is OPEC's magic moment and if they fail to act and grasp it, they may never get an opportunity like this again to impact global oil prices. OPEC has proved that they can move markets as oil prices soared on hopes that they could secure a deal to cut oil production, but whether they can sustain that momentum is a far more complex question.

Oil prices soared on reports that Saudi Arabian and Russian energy ministers could meet in Qatar this week on the sidelines of a major energy forum, industry sources said on Tuesday as OPEC and non-OPEC members try again to clinch an oil output limiting deal per Reuters. Not only are they in critical and heated talks to cut oil output, they are worried about the impact from a Donald Trump presidency and what that could mean for oil prices.

OPEC is worried that not only will Trump unleash a flurry of oil production in the US but also hold OPEC to account for dumping cheap oil on our shores in a direct attempt to put US oil producers out of business. The Saudi oil minister Khalid al-Falih is concerned about Donald Trump’s statements like, “complete energy independence from our “foes” in the OPEC cartel”.

The Saudis worry that President elect Trump may take exception to OPEC oil dumping and instead of making it easier for OPEC producers to produce oil at the expense of US producers, he may allow US producers to compete on a more level playing field. The Obama administration had an adversarial relationship with US oil producers, but seemed to welcome more oil from our "foes” in OPEC.

So, what OPEC decides becomes even more dicey as they must deal with a bearish weekly American Petroleum Institute (API) supply report and a report by the International Energy Agency (IEA). These reports stated that shale oil production is going to fare better than they thought as US producers become better adapted to produce shale at lower price points. OPEC has the power to cut production and send oil back down. If they do it may be many years regardless if they let this magic moment pass.

The International Energy Agency says that oil demand is not going away and won’t peak till 2040 and that shale oil will continue to play a factor in meeting demand. The Dr. Birol of the IEA says,

We are entering a period of greater oil price volatility...If oil prices rise in the short term, then shale producers can react quite quickly to put more oil on the market, producing a see-saw movement. And if we continue to see subdued investments in new conventional oil projects, this could have profound consequences in the longer term...Global oil demand continues to grow until 2040, mostly because of the lack of easy alternatives to oil in road freight, aviation and petrochemicals.

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However, oil demand from passenger cars declines even as the number of vehicles doubles in the next quarter century, thanks mainly to improvements in efficiency, but also biofuels and rising ownership of electric cars.

Coal consumption barely grows in the next 25 years, as demand in China starts to fall back thanks to efforts to fight air pollution and diversify the fuel mix.

The natural gas market is also changing with the share of LNG overtaking pipelines and growing to more than half of the global long-distance gas trade, up from a quarter in 2000. In an already well-supplied market, new LNG from Australia, the United States and elsewhere triggers a shift to more competitive markets and changes in contractual terms and pricing. Dr. Birol says,

Renewables make very large strides in coming decades but their gains remain largely confined to electricity generation...The next frontier for the renewable story is to expand their use in the industrial, building and transportation sectors where enormous potential for growth exists.

The API report was bearish, as crude supply rose 3.65 million barrels last week. Cushing, Oklahoma saw supply rise by 1.13 million barrels that Bloomberg News says was the biggest increase since August. The increase probably was influenced by the Colonial pipeline issues. We also saw a bearish 2.98 million barrel rise in distillates and a supportive 1.55-million-barrel fall in gasoline supply.

Written By: Phil Flynn