Oil Price Forecast Thru 2017: Part 2
Saudi Arabia Declares War on OPEC
Last week, we focused more on the domestic side of my oil outlook through 2017.
Today, we're expanding those reaches to concentrate on another major catalyst for global oil markets: OPEC.
It's kind of hard not to include them, right? After all, OPEC members extract about 33 million barrels of crude every day.
Unfortunately for members, the organization isn't exactly as cohesive as it would like appear. Within this oil cartel is 14 bickering, power-hungry oil producers with one mantra: take care of yourself, and watch your back.
Their individual greed, however, is going to backfire, but taking advantage of this buying opportunity means striking now.
Saudi Arabia in 2017: Panic-Stricken or Calm Coolness?
It's happening again.
Did you hear the rumor mills churning? If not, you will soon. I'm referring to OPEC's latest gambit to push crude prices higher.
And its go-to strategy starts with whispers of a production freeze.
It all started when Venezuela's oil minister suggested that another meeting between OPEC and non-OPEC producers would take place soon to discuss a production freeze.
Given the struggling state of Venezuela's oil industry, this is hardly surprising. I've told you before that the country was on the verge of collapse due to the fact that 95% of its export revenue — and 50% of its GDP — comes from crude oil.
How did other oil producers react?
Drillers in the U.S. scoffed (output in the United States has fallen by roughly 755,000 barrels per day between April of 2015 and May of 2016).
The Russian's laughed... and so did the Saudis.
If you were ever curious how deep the ties of brotherhood are within OPEC, look no further than Saudi Arabia. While fellow members like Venezuela are desperately seeking any respite from low crude prices, the Saudis have turned the pumps on full.
Last month, the Saudis extracted a record 10.67 million barrels per day. To put a little perspective on that, that's roughly one out of every three barrels produced by OPEC!
They're not pulling any punches, but you might want to ask why.
Forget the fact that right now is the time of year when oil demand peaks in the Middle East, when residents and offices blast the air conditioning to avoid the brutal heat.
It's no secret that the Saudi Kingdom is trying to get out of the crude oil business and ramping up its investments in renewable energy. And just to meet its targets for 2020, the country will need to spend upwards $20 billion.
Taking into account the record spending the Saudi royal family is funneling into social programs to bribe citizens into complacency, as well as the low oil price environment, desperately pumping more oil really is their only option.
Of course, it doesn't help that Iran is about 80% of the way to reaching its pre-sanction oil production level.
Is relief on its way?
Consumption Junction: A Global Affair
If you recall, in part 1 of this oil outlook through 2017 last week, I briefly touched on U.S. petroleum demand, saying we are consuming in excess of 20 million barrels per day right now.
Even though that is an unnerving amount of petroleum on a daily basis (especially given the fact that nearly one-half of that supply comes from just three key tight oil-producing regions!), many people don't realize that our consumption has been relatively flat for decades.
Don't expect that to change anytime soon.
Yes, even with impressive growth in renewable energy, fossil fuels are still expected to account for 78% of global energy use in 2040.
It's a bitter pill to swallow for some, but it's simply the reality of the situation for when there are 9 billion people around in 2040.
Now, up until 2015, oil traders have eyed China's increasing oil demand as the catalyst that would drive future growth.
But I want you to focus on something else...
It turns out that India is taking center stage, with demand for transport fuels expected to grow by 350,000 barrels per day this year — right on par with China.
Keep in mind, almost 65% of India's imports come directly from OPEC. It's always disconcerting to think that 22% of your country's oil supply comes from two very precarious members: Nigeria and Venezuela.
But let's take a step back and look at the whole picture...
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Let's assume that U.S. consumption stays flat, even declines slightly over the next few decades. The EIA's current forecast is that global petroleum demand is expected to rise by 31 million barrels per day, topping more than 121 million barrels per day in 2040.
I understand that 2040 is still a ways off. Things change. Outlooks and projections get updated constantly to account for new developments. So what about something a little closer down the road?
That might depend on who you ask...
According to the EIA's International Energy Outlook 2016, global consumption of petroleum and other liquid fuels will rise to 100 million barrels per day in 2020 — an 11% increase from today.
OPEC believes global oil demand will reach 97.4 million barrels per day in 2020, which is actually a 500,000 increase of its previous projections. That's a rather rosy prediction coming from the organization responsible for supplying one-third of the world's oil supply.
Then again, we can't hold much faith in any numbers put out by OPEC... I've always felt they're on the shady side of reporting.
So what are we expecting for oil prices during the next 16 months?
As I'll show you this Friday, I believe oil has found its bottom and is slowly moving into its next bull cycle. And even with the apprehension over the motives of OPEC members, it's clear that global demand will inevitably move higher, with growth being driven by non-OECD countries like India and China.
Coupling that with the fact that falling output in North America (U.S. crude production is now under 9 million barrels per day) will help ease an oversupplied market means we're potentially staring at a significant buying opportunity right now.
Call it a slow balancing act.
The only question left is how you're positioned when the rest of the investment herd catches on.
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.
Energy Demand will Increase 58% Over the Next 25 Years
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