It's Official: OPEC is Panicking
After more than two years of trouble, balance is finally returning to the oil market.
This week we saw one huge sign of the change, even bigger than the price of the commodity itself: floating tankers are being emptied, and supplies are heading back inland.
See, throughout 2015 and 2016, tanker storage was a valuable commodity in its own right.
Companies continued to produce despite the glut, and all that excess supply had to end up somewhere.
Tankers were the ideal storage method since they were already mobile and could be dispatched as soon as a buyer appeared.
But now the glut is easing, and the market is getting back to business as usual.
The End… Or the Beginning?
Another signal of the easing glut has been the shrinking contango, or the gap between spot prices and futures prices.
Today, that gap is much smaller simply because there’s no big jump in price expected.
Most OPEC members, and a few agreeable non-members, have been actively cutting oil production to let the supply-demand balance even out again.
Of course, every barrel OPEC cuts opens the door for other producers to gain market share.
That includes oil drillers in the United States.
Remember, our oil companies have only recently had access to global crude markets.
And now that oil prices have found support above $50 per barrel, the entire E&P sector is starting to boost capital spending, hoping to turn the taps back on.
Since the OPEC deal was approved last November, the number of rigs actively drilling for oil and gas on North American soil has risen by 125, reaching a total of 754.
That’s more than 250 rigs above the point we were at a year ago, and we’re still waiting for this recovery to take off.
Granted, the majority of these new rigs have started popping up in the Permian Basin of West Texas — an oil region that has been ground zero for the U.S. oil industry for more than a century!
Producers down there not only have the advantage of a massive oil resource from which they can extract crude, but those companies are also enjoying the fact that the Permian Basin boasts some of the lowest costs in the Lower 48.
Of course, all this new supply can be a good cause for concern, especially if the OPEC deal is overshadowed by production increases elsewhere.
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Stop the Doom and Gloom
Honestly, I’m not expecting anything nearly that dramatic.
As much as U.S. oil producers want to get their product out into the global market, they’re now acutely aware of what low prices can do to their bottom line.
More notably, so is OPEC.
Some of its biggest members, including Nigeria, Venezuela, and Saudi Arabia, were in financial shock as oil prices plummeted from more than $100 to $30. As it stands, Saudi Arabia needs to see prices around $60 just to break even on its budget for the year.
The U.S. has no such qualms since it’s never had the chance to link its economy so strongly to oil exports.
The two-year rout has, in fact, put producers in an even better position than at the beginning of the shale boom! Necessity is the mother of invention, as they say, and the necessity to cut costs brought about some amazing innovations in shale drilling techniques.
Since 2013, per-well costs have declined sharply, lowering break-even costs across the very best shale plays in the country:
It also thrusts the U.S. into an invaluable position: global swing producer.
That title used to rest squarely on the head of OPEC kingpin Saudi Arabia. But now the country can’t threaten to ramp up production without risking gouging its own economy once again.
Nigeria’s Oil Minister even hinted that OPEC members need to reduce costs if they’re ever going to compete against the U.S.
For the Long Haul
You know, one idea I can’t help but agree with lately is this: we absolutely will not see oil prices suddenly spike overnight.
Let’s just get that out of our heads now...
For one, the OPEC cut is only planned through June this year, and the last thing we want to do is bet our hard-earned money on any future decisions by the oil cartel. Some have speculated that the Saudis are looking for a second production cut at the group’s next formal meeting.
If you’ve put a dime in oil stocks at any point in your life, the first thing you’ll learn is to not let OPEC drive your investment decisions.
And uncovering those tiny investment gems isn’t as easy as you might think. Next week, we’ll talk about some of the strategies you can employ to help you profit no matter what OPEC ends up doing.
Until next time,
A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.
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