Ty’s Take for the Week Ending 8-12-2016

OPEC’s Role in Oil Prices.

This week we saw just how volatile the oil markets are and how subject to every whim they can be. Towards the beginning of the week, we saw minor OPEC members indicating that OPEC may take another shot, informally in September, at agreeing to market stabilizing measures. This took the price of oil up. On Thursday, these sentiments were echoed by major OPEC member Saudi Arabia, again having a positive impact on oil prices.

As you probably read in my article this week about OPEC, I believe OPEC will remain a dominate force, but I question whether that will continue over the long-term. For now, it would be silly to advocate a position where OPEC is not the dominant force in determination of market price.   But over time, as OPEC continues to fight amongst themselves, member states such as Venezuela have increasing difficulties of producing at lower cost oil, and U.S. producers adopt to their role as the new swing producers, I question the ongoing relevance of OPEC. I personally believe OPEC may one day regret its decision to step aside from their role in stabilizing world oil prices and to allow the U.S. to take the helm instead. While OPEC will certainly have, over the long-term, the continued ability to manipulate world pricing, technological innovations from U.S. producers, as well as their focus on efficiency, cost reductions, and ability to bring oil to the market in far less time, might allow them to offset any cuts by OPEC very efficiently (remember our article that Shell has taken their drilling requirements checklist for new shale wells down from 20,000 requirements to less than 200. (See our article - Cost Saving’s May be Here to Stay).That efficiency is here to stay and will allow the U.S. to quickly respond to OPEC’s overtures. Whether producers will decide to do so if OPEC several years from now tries to regain their dominance over world oil prices is another question entirely.

Predictions on Oil Price.

As I commented in this week’s Short Takes (see link below), I think you now have mounting tension in the marketplace between the short-term data which is bearish for the price of oil, and the long-term data which is bullish. Keep in mind that most energy traders are solely focused on the short-term, say 90 days or less which tends to drive the market. Whereas we as an industry are focused on both. While there is certainly bearish news on the short-term (end of summer driving season, normally scheduled refinery maintenance which drops demand for curde, large gasoline inventories), the overall news over the middle to long-term remains bullish. Of course, this has to be tempered by the fact that the longer the forecast, the more unreliable. Anyone who reads the almost 100 page OPEC report and tries to comprehend the data yet alone interpret it can feel how many factors effect world oil prices.

Increasing Importance of Natural Gas.

But the article I think is very relevant to our readers this week is the article on Natural Gas consumption for power generation. NG has been so low for so long that it is easy for us to all focus on crude pricing. It is remarkable that NG has bumped out king coal to be the number one input into American power generation. (See our article - Changing Demand for Natural Gas). If other markets are successful in their ability to renegotiate how Natural Gas is traded on the world stage (see this week’s Short Takes), I think you may see this trend on a more worldwide level as China and other countries dealing with serious pollution issues seek to find cleaner burning fuels. I would therefore encourage our readers to not simply ignore natural gas and solely focus on crude. Both may be important to long-term market stability for the service sector.