Wednesday, December 30, 2015

Is OPEC Still Relevant in an Oversupplied, Low Price Oil Market?

  • The world oil market is estimated to be over-supplied by 1.5M BBL/d, yet Saudi Arabia and OPEC continue to maintain higher rates of production.
  • Prices of oil have plummeted since mid 2014 from highs above $100 per barrel to recent lows below $35 per barrel in December 2015.
  • This article reviews the oil supply and pricing dynamics since the Arab Oil Embargo, including 5 other points in time over the past 40 years when oil prices went up or down dramatically.
  • The data reveal that if you inflation adjust prices back to a time pre-Embargo, using 2015 prices, $50 per barrel is currently the point that prices are likely to stay below until over-supply clears.
  • Additionally, market price and supply levels post 1986 provide valuable investor insight into the geopolitical landscape changes required to change the current market trajectory.

Market discussion was heated after the December 4, 2015 OPEC meeting about whether the organization was “losing its relevance”.  The argument was that since the price of oil continued to free fall after the meeting because the Saudi led cartel did not scale back production to support the price, that somehow the organization had lost its grip on the world oil market.  The inability of the group to agree on an official quota left organization members producing at a rate of 31.5M BBLs a day.  The result of the meeting was not received well by the market.  Subsequent to the meeting the prices of crude dropped below $35 per barrel for WTI and $40 per barrel for Brent and show little sign of quickly rebounding.

To understand the relevance of OPEC today, I believe you need to review the history of points in time that the price of oil moved significantly, both up and down.  And, since oil is priced in U.S. dollars, the prices need to be normalized for U.S. inflation through time so that changes in the supply of oil relative to demand can be better understood.  With this framework in mind, I went back to the point in history when OPEC was arguably at the peak of its power as an organization, the Arab Oil Embargo, and examined 5 major price discontinuity points since that time.  The results of the research are shared in this article I recently published on Seeking Alpha.

Wednesday, December 16, 2015

Oil Prices Lower for How Long? You decide

The business media is currently full of year end predictions, and many concern the future price of oil.
Goldman Sachs lead the charge in predicting much lower prices for oil back in September of 2015 when analysts for the firm published a report saying prices could drop as low as $20 per barrel.  here

And now that oil spot market prices have dropped to the $35 range in mid-December, the market is now set-up for an epic battle for the game of “who is going to be right?”  Ron Insana injected his view on 12/8/2015 that an Oil recovery by 2017? Not likely.  He foresees price levels approaching $20 per barrel and shale oil drillers surviving through higher productivity.  Alternatively, on 12/4/2015 Daniel Yergin, Vice Chairman of IHS, explained his view on Why oil prices cannot stay this low, here.  He sees a range bound trade of $40-$60 for oil over the intermediate future.

Not one to be satisfied with just following the news cycle to assess the probable direction of the market, I gathered some useful facts about the current oil market.  I share them in this article to help investors make their own informed decision about their energy market positions and investment strategy.

U.S. oil market prices on a roller coaster ride since 2008


Oil prices hit an all-time high over $147 per barrel in the summer of 2008, and 6 months later were below $40 per barrel as the U.S. financial crisis left no asset class unscathed, with the exception of sovereign government bonds like U.S. Treasuries.  The price of oil experienced a similar downward juggernaut from June of 2014 into early 2015, dropping from over $100 per barrel in June 2014 to below $40 per barrel by the winter of 2015.  The price of oil has since stayed stubbornly on average below $50, and now seems to be making $40 the over / under zone.