An OPEC Editorial Triggered Crude Oil Spike

An OPEC Editorial Triggered Crude Oil Spike

$OIL, $USO

An editorial the latest OPEC’s Bulletin triggered a price rally in the Crude Oil markets on 31 August. The piece said it stood “ready to talk to all other producers” but emphasized that this had to be on “a level playing field.”

There was nothing there, and nothing new.

OPEC has often said it is willing to talk to other producers and the editorial just reiterated that stance.

What appears to have received less attention is OPEC’s point, made in the same editorial, that world Crude Oil demand is rising, as forecasts by OPEC.

The International Energy Agency (IEA), and the US Energy Information Administration (EIA)  say that if the wide-ranging projections on Crude Oil demand are correct, then it is just a case of riding out the price volatility.

OPEC said, “the one good thing to come out of a period of lower prices is that demand customarily rises as cheaper fuel encourages more usage by the consumers. And the current situation appears to be no exception.”

There has also been much said about the possibility of talks at some point between OPEC and Russia, with a meeting set to take place between Nicolas Maduro, President of OPEC member Venezuela, and Russian President Vladimir Putin Thursday, 3 September in China.

At that meeting it is expected that attention will be paid to possible joint steps to stabilize prices on the international oil market, particularly in the context of cooperation between Russia and OPEC.

Citibank (NYSE:C) analyst Ed Morse, in a note on 1 September, questioned why any non-OPEC producer would want to commit to a target with OPEC.

“2015 is not like 1998 when Mexican and Russian production were surging and when both countries participated in a supply cut. Russian production is growing this year because of a significantly weaker ruble cost of oil while Mexico is trying to push through energy reform. Neither country is in a position to really commit to a production cut, in our view,” he wrote.

Mr. Morse dismissed any likelihood of the United States, Canada or Brazil willingly cutting production the main beneficiaries of a cut today would be US producers that can react quickly to price changes.

The proponents of OPEC’s market share policy, Saudi Arabia and its Gulf neighbors have been pleased to read the 31 August revised data from the US Energy Information Administration, showing that US producers had cut output in response to the recent Crude Oil price decline.

Market share not only about OPEC producers competing with non-OPEC producers; there is also a battle for market share going on within OPEC itself.

And Iran, assuming the Western sanctions are lifted, could push a sizable volume of additional Crude Oil onto world markets very soon. Tehran already signaled that sights will be fixed primarily on Asia, where competition is already intense.

This all comes down to the Big Q: Who is going to cut production?

Stay tuned…

HeffX-LTN

Paul Ebeling

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