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nascarhuntingfishingnut 7 posts  |  Last Activity: Jun 21, 2016 11:49 AM Member since: Oct 20, 2012
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    Why OPEC will never cut production again

    Published: Mar 2, 2016 10:31 a.m. ET




    141








    By

    Kirk
    Spano



    Kirk Spano, the winner of the first MarketWatch competition to find the world’s next great investing columnist, is a registered investment advisor and founder of Bluemound Asset Management, LLC which seeks to provide investors with greater safety, growth, income and freedom. Kirk’s biography and various business endeavors can be found at KirkSpano.com. Follow Kirk on Twitter @KirkSpano or at the Bluemound Facebook page for his columns, company analysis, letters, trade notes and what he is reading.



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    Since the December OPEC meeting, I have come to one inescapable conclusion: that OPEC will never cut production again at the expense of its own market share. Based on that idea, in the past couple of months, my clients, subscribers and I have done well to trade around oil's further decline, the slow bleed out of indebted oil stocks and even bet against a few banks. In the past week, however, oil has shown some strength on the back of young traders and short covering. With huge resistance around $37 per barrel of oil, I don't see that strength lasting long.

    Back in late 2011 I identified — at about the same time that several institutions did — that the U.S. shale industry was going to change the global energy dynamic and recommended buying oil stocks. By 2014, I recognized that the price of oil would collapse, suggested selling oil stocks and invested in the dollar. In 2015, I made the same mistake that T. Boone Pickens admitted to recently, in that I, too, believed the rebalancing of the oil market would happen much faster than it has. The result was that I gave back a lot of 2014's gains.

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    But now times have changed again. Here are my reasons for OPEC’s actions. First and foremost is a question of logic. Why should the lowest-cost producers of oil subsidize the highest cost? In what we know is the beginning of the end of the oil age, it simply doesn't make any sense to let the highest-cost producers survive when the entire oil industry is slowly gliding toward a form of long-term business run off. It is not in the interest of the low-cost producers to cut production when the market will eventually kill the high-cost producers.

    The International Energy Agency also just came to the same conclusion: "In 2016, we are living in perhaps the first truly free oil market we have seen since the pioneering days of the industry." If that's the case, low-cost producers will produce as much as possible from here on out. Oil-price increases will come from lower output from higher-cost producers who can't finance questionably economic new projects going forward in most cases.

    Saudi Arabia has no intent to cut production. Their freeze agreement with Russia and a few others is simply an acknowledgment that they have reached the point where they want to be. Anybody who listened to or read Crown Prince and defense minister of Saudi Arabia Muhammad bin Salman's interview in January (The Economist) should have no doubts about his resolve. He realizes the power of the kingdom's oil and is going to use it.

    One clear sign that Saudi Arabia has no intention of cutting production is the likelihood that they are taking Saudi Aramco public. By doing this, Saudi Arabia can claim that they are not in control of oil production, the same way that Russia and western nations do when they point out their oil companies are privately owned. By taking Aramco public, the Saudis can take a windfall and create a cash-flow machine for the royal family and the country (presumably). I could see a small cut in Saudi oil production just ahead of taking Aramco public to goose the IPO, but not likely before then.

    What about the other players?

    Iran has stated that they will increase production by a million barrels per day over the next year. While they probably miss on that target, there is no doubt they are on a path to much higher production. The rest of OPEC will never cut to offset Iranian production entering the market over the next two years when higher-cost oil will die anyway.

    Iraq, while they have signed off on the freeze, is only partially signing off. The Kurds in the north, who operate independently (though maybe not completely legally), are not going to stop increasing oil production short term. Longer term, Iraq is unlikely to hold the line as they need more revenue to rebuild.

    Libya is over a million barrels per day below their normal production due to the civil war there. At some point, that production will come back to the market, as they too will need to rebuild.

    Non-OPEC adjustments

    So, over the next year or two, there is virtually no chance that OPEC cuts production. After that, they might cut production slightly to maintain pricing, but not at the expense of market share. We will continue to see the adjustments to supply come from non-OPEC higher-cost producers depleting assets and not reinvesting. OPEC will not only keep their market share, they will increase it by a couple of million barrels most likely. I've come to agree with those who think the oil market won't clear until the price of oil hits $20/barrel or lower for a day or two — likely sometime this spring, in my opinion — and trades in a range of $25 to $45 for a period as the National Bank of Abu Dhabi PJSC recently suggested.

    For investors, the idea of value hunting in the oil space has become slightly more popular lately, particular betting on a rise in oil prices. The Velocity Shares 3x Long Crude Oil ETN UWTI, -6.79% has been among the most active vehicles of late. It is a very risky bet in my opinion, as the long-term trend is against it. Traders using that fund are betting on a reversal that is probably not here yet.

    Disclosure: Kirk Spano and certain clients of Bluemound Asset Management do not own any security mentioned. Subscribers to Fundamental Trends have no recommendations to buy any security mentioned. Neither Spano nor Bluemound clients plan any transactions in the next three trading days. Opinions subject to change at any time without notice.

    Sentiment: Strong Buy

  • nascarhuntingfishingnut nascarhuntingfishingnut May 3, 2016 10:28 AM Flag

    Why are the concerns 'renewed'? Nothing has changed over the last year- we were told output would increase- Iran, Iraq, Libya, Russia all made it clear they were not going to decrease production....the US is sitting on a 540 million barrel excess inventory. Every week we hear bout tankers sitting off the terminals with no where to unload their crude....and now, a global economic slowdown if evident

    Sentiment: Strong Buy

  • nascarhuntingfishingnut nascarhuntingfishingnut May 3, 2016 3:55 PM Flag

    Probably right. Didn't see that twisted way of turning it around to save the Dow I guess?

    Sentiment: Strong Buy

  • Reply to

    Get Ready To See Oil Jump to 60-70 this May !!!

    by pjnj_happy May 1, 2016 5:43 PM
    nascarhuntingfishingnut nascarhuntingfishingnut May 3, 2016 3:57 PM Flag

    Well pjnj_happy at least you did get to see some double digits! Too funny you are!

    Sentiment: Strong Buy

  • nascarhuntingfishingnut nascarhuntingfishingnut May 13, 2016 3:45 PM Flag

    Oil prices fall on stronger dollar; Russia warns of longer glut



    Reuters

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    A worker grabs a nozzle at a petrol station in Tehran, Iran January 25, 2016. REUTERS/Raheb Homavandi/TIMA
    Thomson Reuters

    Worker grabs a nozzle at a petrol station in Tehran

    By Henning Gloystein

    SINGAPORE (Reuters) - Oil prices fell by around one percent on Friday as a stronger dollar weighed and Russia warned that a global crude supply overhang could last into next year.

    The dollar has recovered 2.46 percent in value from May lows against a basket of other leading currencies , reversing an almost 8-percent fall earlier in the year.

    A stronger dollar, in which oil is traded, makes fuel imports more expensive for countries using other currencies, potentially hitting demand.

    International Brent crude futures were trading at $47.66 per barrel at 0650 GMT, down 42 cents or 0.9 percent from their last settlement.

    U.S. West Texas Intermediate crude futures were down 54 cents, or 1.18 percent, at $46.16 a barrel.

    But analysts said that declining output, especially in North America was preventing deeper price falls.

    "A stronger U.S.-dollar came up against more positive fundamentals ... due a fall in U.S. oil production," ANZ bank said on Friday.

    U.S. crude oil production has fallen 4.7 percent from 2016 peaks in January to 8.8 million barrels per day (bpd), according to U.S. Energy Information data, and output is down 8.4 percent from its 2015 peak.

    In Canada, crude production outages from oil sand fields following forced closures due to wildfires still stood over 1 million bpd as of Wednesday, although operators said they were gradually ramping up output.

    "Wildfires may have temporarily shut in as much as 1.4 million bpd of production, but there appears to be no facility damage. Operations are beginning to restart, but we believe (assuming no pipeline damages) it will take weeks to ramp production," U.S. investment bank Jefferies said.

    With global demand rising by 1.4 million bpd in the first quarter of 2016, compared with the same time last year, consumption remained strong, also supporting markets.

    Yet top crude oil producer Russia poured cold water on the notion that recent falls in production in the Americas, Asia and Africa had wiped out a global production and storage overhang that helped pull down oil prices by over 70 percent between 2014 and early 2016.

    Russian Energy Minister Alexander Novak told reporters on Thursday that the global oil surplus stood at 1.5 million bpd and that the market might not balance out until the first half of 2017.

    "(The outlook that the market won't balance until the first half of 2017) is an optimistic forecast as oversupply persists and the decline in production volumes is slower than analysts expected," he said.

    Novak said he expected Russia to produce 540 million tonnes (10.81 million bpd) or more of oil this year, up from 534 million tonnes in 2015.

    (Reporting by Henning Gloystein; Editing by Anupama Dwivedi)

    Read the original article on Reuters. Copyright 2016. Follow Reuters on Twitter.

    Sentiment: Strong Buy

  • nascarhuntingfishingnut nascarhuntingfishingnut May 14, 2016 7:32 PM Flag

    Thank you ag_spoon!

    Sentiment: Strong Buy

  • Reply to

    Start buying DWTI

    by jrcumins Jun 17, 2016 10:31 AM
    nascarhuntingfishingnut nascarhuntingfishingnut Jun 21, 2016 11:49 AM Flag

    Also driving season will be soon be shot lived or over In the USA. Less demand for gasoline.

    Sentiment: Buy

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