The current falling oil price is not all about excess supply or the slowing down of the global economy. It is about control, the control of world oil prices by OPEC. As US oil producers refined and improved the fracking technology for extracting oil, this has caused a hidden price war launched by OPEC to retain control of the oil market. While there is an oversupply of oil, the largest OPEC oil producer, Saudi Arabia has not reduced its oil production to halt the falling price of oil. Not only OPEC did not cut production, it has just reduced the price of oil destined to the US. This price reduction has two purposes, one is to retain market share, and second is to determine at what price level it will cause US oil producers to cut their production. It is vital for OPEC to know the US producers’ breakeven price level in order to control the world oil market.
Showing posts with label OPEC. Show all posts
Showing posts with label OPEC. Show all posts
Tuesday, November 4, 2014
Wednesday, March 18, 2009
Are You Still Skeptical About This Rally?
This is a bear market rally and it will terminate when it reaches its objectives. The objectives are to squeeze all those skeptical bears and trap those anxious bulls. With options expiration occurring this week, a high level of skepticism on the strength of this relief rally, and the latest announcement from the Fed on buying $300B worth of long term treasuries, the market continue to chop higher. As those skeptics sitting on the sideline feeling they might be missing the rally finally dive in and those stubborn bears getting squeeze on their shorts as the market continue to move higher, the rally will then come to an end. From the following charts, I have reiterated the levels I been monitoring. I believe this rally is getting close to the end. Therefore, I will be starting to trim my long equity positions and use tight stops. I will continue to focus on trading opportunities for the gold and oil ETF, GLD & USO respectively.
The Gold Trade
As gold retraced below the trendline and went under $900 an ounce today, a dramatic reversal occurred soon after the Fed announced its intention to buy $300B of treasuries. Gold recovered all its earlier losses and ended up nearly $40 an ounce, a $60 plus intraday reversal. The manner it reversed and that it closed near the high of the day shown the move had strength. Furthermore, its ETF GLD traded with extraordinary high volume. Today's move could be the trigger gold was waiting for to make another attempt at breaking above the $1000 mark. Click on the charts below to see my comments and also read my previous post on gold to see where gold might be headed.
The Oil
Conventional wisdoms would had bet that crude prices will be down since last weekend's OPEC meeting ended with no additional reduction in production output, and with this morning's EIA inventory report showing an increase of 2M barrels. But instead, it held its ground and stayed near the $50 level. Another reminder not to trade based on the obvious because the market will rarely do what is expected. From the chart, one can see the price actions are pointed toward higher prices in the near term. And in the market, price is king.
The Gold Trade
As gold retraced below the trendline and went under $900 an ounce today, a dramatic reversal occurred soon after the Fed announced its intention to buy $300B of treasuries. Gold recovered all its earlier losses and ended up nearly $40 an ounce, a $60 plus intraday reversal. The manner it reversed and that it closed near the high of the day shown the move had strength. Furthermore, its ETF GLD traded with extraordinary high volume. Today's move could be the trigger gold was waiting for to make another attempt at breaking above the $1000 mark. Click on the charts below to see my comments and also read my previous post on gold to see where gold might be headed.
The Oil
Conventional wisdoms would had bet that crude prices will be down since last weekend's OPEC meeting ended with no additional reduction in production output, and with this morning's EIA inventory report showing an increase of 2M barrels. But instead, it held its ground and stayed near the $50 level. Another reminder not to trade based on the obvious because the market will rarely do what is expected. From the chart, one can see the price actions are pointed toward higher prices in the near term. And in the market, price is king.
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Wednesday, October 22, 2008
Not In My Backyard!
OPEC will be holding its meeting this Friday, October 24, 2008 to establish a cut on oil output in an attempt to stabilize the oil prices. I don’t believe anyone would doubt OPEC will end the meeting with no cut on oil output. The market is estimating OPEC will announce a cut between 1M to 2.5M barrels a day. Today, the price for a barrel of crude dropped to $66.75, losing $5.43. One wonder what could be the reason for oil prices to fall if an impending cut is coming. Here is a possible scenario that the market might be anticipating ahead of the meeting, and might explain why the price of crude continues to drop.
There is no doubt that OPEC will announce some level of output cut this Friday. But it really doesn’t matter what level of cut OPEC will announce, the actual output will remain the same if not more than what it is today. The cause for the actual output to be unchanged is the ‘not in my backyard’ attitude. It’s similar to all those people favor nuclear power, when a nuclear power plant is proposed to be built in their city or state, they will object and tell you that “you can build it anywhere as long as it is not in my backyard.” Similarly, every OPEC members want to cut output level to maintain the price of crude to be above $70 a barrel, but none of them (except the Saudi) are willing to take the cut because they need the oil revenue to finance their country’s expenditures. Therefore, no matter what the cut OPEC agreed upon, the Saudi has to shoulder the actual cut because it is the only member country that can afford it. Iran and Venezuela will be the most aggressive countries demanding a bigger cut in output to ensure higher prices, and they will be the least willing countries to absorb the cut. The Saudi is well aware this is not the right time to cut output and force a higher oil prices to a weakening global economy. In order to satisfy OPEC’s demand to cut output in an attempt to halt the drop on oil prices, the Saudi will agree to take the cut if the output reduction is 1M barrels a day instead of the more aggressive cut proposed by more radical OPEC members such as Iran and Venezuela. The Saudi also understand the demand destruction will be greater and quicker than it is now if the price of crude is kept too high. So at the end of all the talk about output cut, the announced number will only be symbolic, a show of desires but not wills. The 1M barrels cut agreed by Saudi Arabia will only bring the supply and demand closer to balance. But as Iran and Venezuela keep pumping more oil exceeding their quota onto the world market to generate the necessary revenue to meet their country’s needs, they will continue to put downward pressure on prices. As prices continue to decline, the supply of oil will continue to rise due to those OPEC countries that need to sell more oil to make up for the lower prices in order to maintain a level of revenue. Their action will push the price to the $30-$35 a barrel. At this price level, which is near the Saudi’s breakeven level, the Saudi will then exert its power to force the OPEC members to cut production or it will glut the market with oil and drive down the prices that will cause great economic and political pains for other member countries. I believe this could be a scenario the market is anticipating, and that is why the price of crude will continue to fall until it reaches that critical price (whichever it may be.) This scenario is not new. It has happened before, and it will happen again in the future. Let's wait and see if this scenario will play itself out once again.
There is no doubt that OPEC will announce some level of output cut this Friday. But it really doesn’t matter what level of cut OPEC will announce, the actual output will remain the same if not more than what it is today. The cause for the actual output to be unchanged is the ‘not in my backyard’ attitude. It’s similar to all those people favor nuclear power, when a nuclear power plant is proposed to be built in their city or state, they will object and tell you that “you can build it anywhere as long as it is not in my backyard.” Similarly, every OPEC members want to cut output level to maintain the price of crude to be above $70 a barrel, but none of them (except the Saudi) are willing to take the cut because they need the oil revenue to finance their country’s expenditures. Therefore, no matter what the cut OPEC agreed upon, the Saudi has to shoulder the actual cut because it is the only member country that can afford it. Iran and Venezuela will be the most aggressive countries demanding a bigger cut in output to ensure higher prices, and they will be the least willing countries to absorb the cut. The Saudi is well aware this is not the right time to cut output and force a higher oil prices to a weakening global economy. In order to satisfy OPEC’s demand to cut output in an attempt to halt the drop on oil prices, the Saudi will agree to take the cut if the output reduction is 1M barrels a day instead of the more aggressive cut proposed by more radical OPEC members such as Iran and Venezuela. The Saudi also understand the demand destruction will be greater and quicker than it is now if the price of crude is kept too high. So at the end of all the talk about output cut, the announced number will only be symbolic, a show of desires but not wills. The 1M barrels cut agreed by Saudi Arabia will only bring the supply and demand closer to balance. But as Iran and Venezuela keep pumping more oil exceeding their quota onto the world market to generate the necessary revenue to meet their country’s needs, they will continue to put downward pressure on prices. As prices continue to decline, the supply of oil will continue to rise due to those OPEC countries that need to sell more oil to make up for the lower prices in order to maintain a level of revenue. Their action will push the price to the $30-$35 a barrel. At this price level, which is near the Saudi’s breakeven level, the Saudi will then exert its power to force the OPEC members to cut production or it will glut the market with oil and drive down the prices that will cause great economic and political pains for other member countries. I believe this could be a scenario the market is anticipating, and that is why the price of crude will continue to fall until it reaches that critical price (whichever it may be.) This scenario is not new. It has happened before, and it will happen again in the future. Let's wait and see if this scenario will play itself out once again.
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