Wednesday, December 23, 2015

Impetus Behind OPEC's Oil Oversupply Strategy

Current oil price war misunderstood by many. 

Maintaining market share isn't the root of the battle. 

Why OPEC may never be able to turn off the spigots. 

Over the long term, OPEC's loss of market share is foregone conclusion. 


If there wasn't so much at stake for oil investors, it would be amusing to comment on the analysis foibles of those continuing to suggest the reason OPEC is being pressured to continue production and supply levels so high, is in order to maintain market share.

What most are missing is market share is still a metric being used to represent the outcome of supply increases, but it's no longer the impetus behind maintaining supply at current levels, and even increasing it over the next year or two.

The problem most aren't seeing is this: what will OPEC do once it reaches the alleged market share position it is seeking to maintain, in light of the known recoverable shale oil reserves around the world?

more on what's driving OPEC's oil supply strategy

Wednesday, December 16, 2015

How Bad Can It Get For Shale Oil?

Summary

There is nothing Saudi Arabia or OPEC can do about shale oil over the long term.

At best they can only delay the inevitable.

Millions of barrels of shale oil will be introduced into the market over the next decade.

Companies with shale exposure, over time, will take market share away from OPEC.



From some of the headlines I've read recently, you would think the U.S. shale industry has been defeated by Saudi Arabia and OPEC, and everything in the oil sector going to return to where things were before shale producers entered the market.

Not only is this a fallacy, it is the exact opposite, which is why the strategy of oversupplying the market will remain in place for now in order to keep the price of oil low, which in turn makes it more difficult to invest in new exploration and development.

The idea of market share being the battleground being fought over is a misguided one because, that would suggest shale oil can be defeated around the world. It's not going to happen. It won't even happen in the U.S., let alone the world.

In the short term there will continue to be pain in the shale segment of the oil sector, as more companies will be forced to go bankrupt, and those that are stronger will have to put development on hold until more favorable market conditions emerge, which of course means a higher oil price.

more on worst-case scenario for shale oil

It's OPEC against OPEC!

Summary

OPEC's greatest competitor is now OPEC.

The real reason OPEC oil production levels will remain high.

What the market is transitioning into.

Is a real free market oil industry emerging?



There are a lot of variables behind the reason the price of oil has plunged, as producers ramp up production in an attempt to maintain market share.

When Saudi Arabia and OPEC decided to boost production in response to the serious threat of U.S. shale oil, that was the primary impetus behind pushing prices down, in order to put extreme pressure on the quickly-growing shale competitors before they were too big to be dealt with.

As time as passed though, and U.S. producers have been forced to lower production levels and reduce exploration and development spending, a scenario has emerged that has gravitated to OPEC itself.

With Iran about to be released from sanctions, it has aggressively and publicly stated it will take steps to gain back market share it has lost, and will do what's best for the country, which was a reference to ignoring anything Saudi Arabia had to say about it.

This is one of the reasons the latest OPEC meeting was meaningless, as it was already known by those that really follow the industry and understand what's going on, that there was no chance of an agreement being reached on production cuts. It's doubtful it was even a serious part of the conversation, if it was brought up at all.

more on OPEC's internal competition

Hope for Oil Price Rebound in 2016 Fading

* Outlook for the price of oil in 2016 looks weak.

* Why it'll take a lot for competitors to come to a production cut agreement.

* U.S. shale will remain resilient, but offshore and Canadian sands will struggle.

* There are no visible catalysts to provide support to the price of oil.



It's humorous to see headlines in the financial media bleating out the idea that the price of oil is crashing because of the decision by OPEC to do nothing to reduce production levels.

I've been on the record for a long time saying it's not going to happen, and there were a number of others, understanding what's really happening in the oil industry, coming to the same conclusion.

Maybe some were hoping it would happen, but the disruption caused from the emergence of the U.S. shale industry has forever changed the oil market landscape, and as Saudi Arabia is finding out, it doesn't matter how much supply is brought to market, it is here to stay.

What that suggests is oversupplying the market won't be able to destroy shale. It does mean the days of Saudi Arabian dominance are coming to an end because eventually it'll have to influence other OPEC members to lower production in order to support the price of oil. It will either lose revenue by maintaining or increasing production levels, or lose revenue by lower production and losing market share. There is no third option.


more on 2016 oil price outlook

Thursday, August 6, 2015

Bold Oil Investors Can Make a Killing

Headlines like the one screaming the oil crash has caused losses to date of about $1.3 trillion, should be ignored by those that weren't affected by the disaster, as it has brought about opportunities rarely seen in one's investing lifetime.

The demand for oil is never going to go away, and the price it is now at won't remain at that low level for a long period of time. Producers will simply cut back until the price starts to rise to a level that is profitable to them. That of course has already happened, and it will take time until the effect of it works its way through the market.

That said, I don't see oil prices getting a huge bounce in the short term, and those taking a position in the sector, will need to have patience while waiting for the profits. Those in it for the long term will make a lot of money if they don't sell too quickly.

read more