OPEC Founder Topples
A few weeks ago, I was enjoying the slow crawl of gasoline prices.
They inch up in the summer anyway, but it was also a clear show of oil’s slow but sure progress toward recovery.
And while I can’t really say I was glad to be paying more at the pump, the return of profits on my oil investments more than made up for it.
However, last week we hit a bit of a snag.
If you, too, are now paying as much as $20 extra to fill up the tank, you can thank our friend Harvey.
The hurricane that rampaged across southern Texas for the better part of a week left not only homes and dams flooded out, but also a large portion of the country’s oil refineries out of commission.
Nearly 30% of all U.S. refining capacity was right in the path of the monster storm...
Throughout the week, as much as 2.2 million barrels per day of capacity was cut off, and that oil was stranded inland.
That’s millions of barrels per day of refined petroleum products suddenly missing.
Even though product tankers headed to different ports were diverted to Texas, and the U.S. Strategic Petroleum Reserve was tapped into for as much as 500,000 barrels, gas prices around the country went up more than $0.30 on average.
The bottleneck in crude coming out of the most productive plays in Texas pushed oil prices back down under $50, though they’ve recovered a bit this week.
It’s not the kind of recovery situation we’d been hoping to see...
But at least it’s just a temporary one.
OPEC Founder Topples
The situation with OPEC, as you may have gathered, can’t be repaired quite as quickly.
Yet another OPEC-Russia output cut extension may be around the corner, but given the limited reaction to the first one, I don’t expect prices will jump the way these oil giants are hoping.
Besides, it looks like OPEC may be down a member any day now.
Venezuela, once one of the organization’s biggest members and home to the world’s largest oil reserves, has taken another blow that it may not ever bounce back from.
Yes, the same country that was a founding member of OPEC; the same country that holds a mind-blowing 300 billion barrels of crude oil in proved reserves — the largest on the planet!
Earlier this week, the head honcho of Venezuela’s state-owned PDVSA and eight other company executives were arrested and are now allegedly facing corruption probes.
This isn’t the first sign of trouble for the flailing oil company, either.
For years, the company has had a bad reputation for alleged corruption from its higher-ups.
In 2016, a congressional charge claimed that the company had lost as much as $11 billion between 2004 and 2014, none of which apparently had anything to do with the two-year oil price rout.
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This new drama has put Venezuela in an odd position as an OPEC member.
The country was already in turmoil under the rough political climate.
President Nicolas Maduro brought his own laundry list of scandals into office with him, and the drama hasn’t slowed one bit since he’s been in charge.
Unfortunately, his government relies on oil revenues to keep social programs and national budgets afloat.
And there’s been little enough oil revenue for the country in the past few years.
The country’s oil industry was slipping due to a lack of investment and poor project management long before prices took their plunge in 2014.
This scandal could be the final straw for a country already on the edge of revolution.
Down, Down, Down in a Burning Ring of Oil
Could PDVSA be shut down?
Would it matter if OPEC lost this producer?
I don’t think so, because for the most part, it already has.
Venezuelan production and exports have slipped drastically, as oil prices languished far below the price Venezuela needs to just break even on its operations.
This, coupled with the political skirmishes, took Venezuela out of the game long ago.
And the rest of OPEC is still struggling to make up the difference.
Meanwhile, U.S. shale is expected to bounce back from its own stormy situation pretty fast.
At the time of writing, WTI is already back up to $49, and Brent crude has risen to a record for the year at $54.
Which means, unfortunately, higher gas prices are here to stay.
But if you’ve been paying attention, you’ll have seen that there are plenty of ways to make that money back.
Refineries affected by Harvey are already coming back online and making up for lost time.
Oil will continue its progress higher throughout the year, and U.S. producers are already setting themselves up for a more profitable future.
We’ll be keeping an eye on our favorite picks, especially those in Texas’s own Permian Basin.
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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