The late September gathering in Algiers among OPEC and a few non-OPEC member nations to trim oil production gave the crude oil market a lift.
However, I see the “agreement” as a last gasp attempt to keep OPEC relevant.
The proposal: To limit OPEC oil production in the range of 32.5 million and 33 million barrels per day. This equates to a cut of as much as 700,000 barrels per day from the cartel’s estimated September OPEC production.
That’s a drop in the bucket compared with EIA data putting third-quarter world supply at 96.66 million barrels per day.
That alone means it’s hardly enough to keep oil prices moving higher. But there’s more: The deal won’t last … because OPEC is broke!
It’s becoming clear that many OPEC members are under significant financial pressure to keep prices low. Perhaps that’s why they increased September oil production to 33.39 million barrels per day – the highest since 2008.
The fact of the matter is that they need higher oil prices to boost revenues and cash flow.
Saudi Arabia, once the world’s largest oil producer, relies on oil extraction to fund their economy and represents around 45% of their GDP. Their desire for higher prices comes as second-quarter growth in the country is running at a paltry 1.4% year over year rate. That compares to 4.02% in the year-ago period.
Saudi Arabia faces deteriorating fiscal conditions and a growing budget deficit. This comes as oil revenues make up 90% of the country’s budget.
Then there’s Iran, who’s committed to ramping up crude oil production to recover from financial devastation caused by western sanctions.
The worst of the lot is Venezuela, with a worthless domestic currency (bolivar) and an estimated crude oil breakeven cost of $120.00 per barrel.
Hype over an OPEC agreement to trim oil production is too little too late.
The fact is OPEC is no longer in charge. Want to know who is?
That’s right: The U.S. has emerged as the world’s swing oil producer.
Two years after OPEC’s decision to capture market share, U.S. oil producers fought for survival and are now much leaner. During that time, U.S. shale oil producers lowered breakeven prices by around 35%.
This means that the more than 17% rally in crude oil prices during the last three weeks will usher in a flood of new U.S. supply on to the market.
In fact, by some estimates, higher oil prices could boost U.S. shale oil production by as much as 5.5 million barrels per day.
And that has OPEC shaking in their boots.
With the U.S. providing the swing supply in oil, it’s no wonder my Artificial Intelligence models confirm a topping pattern in crude oil prices, with falling prices into February. Take a look for yourself …
Bottom line: The OPEC agreement isn’t going to hold. Add in robust production from the U.S. — the world’s new swing oil producer — and it’s clear that oil prices are headed lower in a big, big way.