Oil's Latest Plunge Stretches Our Window of Opportunity
Did you want a cut?
Well, you got a cut.
On the surface, the latest decision by OPEC+ to cut a whopping 9.7 million barrels per day from its May and June output should have sent crude prices ripping higher over the last few days.
The market wasn’t fooled as crude prices traded lower this morning.
If you’re wondering why it’s because the numbers simply don’t add up.
They’re downright confusing.
Fortunately, oil’s fresh plunge below $20 per barrel is stretching our window of opportunity to take advantage of the situation.
Don’t mistake me for a pessimist, because I know for a fact that investors can make money in this incredibly bearish market, but we can’t get excited over the latest supply cut.
If there’s one thing we know OPEC+ is good at, it’s that they are pretty damn good at skewing numbers.
We’ve talked about OPEC’s shady reserve increases during the 1980s before. In a decade, the oil cartel’s largest players effectively doubled their reserves.
Iraq managed to accomplish that feat twice!
Take a look for yourself:
The cuts this time around were dependent on everyone paying their fair share, and it turns out that OPEC+ added a handful of members to the mix.
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Each member is taking a 23% cut to their baseline output, and it looks a little something like this:
Nothing was going to get accomplished unless G20 nations also shouldered some of the burdens.
It wasn’t easy to close this deal, either.
When Mexico balked at the idea of slashing 400,000 barrels per day, the deal was suddenly in jeopardy.
If I told you that a historic production cut by the world’s largest producers would be spoiled by a stubborn Mexico, I would’ve been laughed out of the room.
That’s what we’ve come to.
To ink the deal, President Trump stepped in and announced that the U.S. would cut 250,000 barrels per day — on top of the two million barrels per day haircuts we’re expected to take this year.
So here we are, the largest production cut in history is announced, oil prices are under increased pressure, and you sometimes you feel like you just can’t win?
For starters, the production baseline used was from October 2018 levels, which were several million barrels per day higher than they were a short while ago. Russia and Saudi Arabia’s reference production for these cuts were set at 11 million barrels per day.
The 9.7 million barrels per day they’re slashing from production would only take place in May and June.
Those cuts will taper off to 7.7 million barrels per day for the second half of 2020.
Starting in 2021, it will be lowered to 5.8 million barrels per day and last through 2022.
Their hearts are in the right place, but sadly there’s a much bigger problem for this fledgling oil cut deal.
I’m talking about demand.
This cut is only HALF of what we need.
Analysts are projecting global demand to contract by 20 million barrels per day — and those are the conservative estimates.
Some projections have reported that we’ll lose 30 million barrels per day from global consumption.
And that, dear reader, is where we take advantage of the situation.
Put, the cut just isn’t enough.
Adding the demand destruction into the equation, and it’s easy to see producers desperately scrambling around to find a place to store their crude.
Within the next six weeks, we may easily see U.S. storage hit capacity.
Yesterday, The American Petroleum Institute reported a mega-build of 13.1 million barrels to crude oil inventories in the United States.
That’s much larger than what everyone was expecting.
If you want to know who’s seeing the biggest profits from this over-supplied market, tanker stocks are one corner to own ahead of time.
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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