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Can OPEC Orchestrate An Oil Recovery?

By:
Barry Norman
Published: Aug 30, 2016, 08:48 UTC

Oil benchmarks were down across the board on Monday with the stronger US dollar weighed heavily on the commodity and energy sectors. Current price levels

It seems all oil producing nations are now willing to cooperate in some degree to help move prices into some guided recovery

Oil benchmarks were down across the board on Monday with the stronger US dollar weighed heavily on the commodity and energy sectors. Current price levels have little to do with actual supply and demand fundamentals and are all about speculators pushing up and down prices to make profits as the OPEC meeting looms closer. It seems all oil producing nations are now willing to cooperate in some degree to help move prices into some guided recovery.  Except no one seems to want to reduce production or take responsibility for pushing up prices in lieu of market dominance.

Crude oil prices are trading at 47.32 while Brent oil matched losses to trade at 49.70. This year has been a roller coaster for the oil traders. Markets had a near 100 percent rise from February lows, followed by a drop of more than 20 percent, which took the oil markets into a bear phase. However, the bear phase lasted only for a few days, as the markets again gained 20 percent. Though part of the price action is due to fundamentals, the rest can be attributed to speculation.

crude oil prices with notes

The speculators in the oil markets feed on the rumors and fundamental news, and overshoot prices way above logical levels, trapping smaller investors.

Over the weekend Iran said that they would cooperate with a production freeze under their terms. Venezuela, have proposed to push prices higher, namely freeze oil production (at a level which is an all-time high output for OPEC’s largest member, Saudi Arabia, beyond which it can’t produce even if it wanted). So earlier today, Iran’s oil minister Bijan Zanganeh made the most explicit statement on the topic, when he laid out the conditions under which Iran would be willing to “help other oil producers stabilize the world market.”

Iran will cooperate as long as it is excluded from the freeze, or as Reuters put it, Iran will cooperate “so long as fellow OPEC members recognize its right to regain lost market share, the country’ oil minister said on Friday.” In other words, Iran will endorse an OPEC supply freeze as long as it can keep pumping more.

Iran, OPEC’s third-largest producer, boosted output after Western sanctions were lifted in January, and had refused to join OPEC and some non-members in an accord earlier this year to freeze production levels.

crude oil

During early August, 2016, speculative NYMEX short crude oil positions reached the highest level in the past ten years. Since the IEA report came out on August 11th, the shorts have been scrambling to cover their positions. They are having a hard time finding enough sellers willing to cover their positions at these low prices. The fundamentals also are supportive of oil prices. Non-OPEC production is on steady decline. Demand growth is relentless, moving up more than a million barrels per day each year. This world will soon be consuming over 100,000,000 barrels of hydrocarbon based liquid fuels and feed-stock daily. It is clear that the price of oil cannot stay under $50 much longer because producers cannot meet demand at that price.

OPEC only supplies about 40% of global oil demand. Outside of the Middle East there are only a few places where oil reserves can be developed profitably for under $50/Bbl. We are lucky to have a few of them in the United States.

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