Welcome to the Wednesday edition of FutureSource.com's Fast BreakTM.
Today's author is Phil Flynn. Phil is Vice President, Energy and General Market Analyst with Alaron Futures and Options and is one of the world's leading energy market analysts. Phil heads the Alaron Energies Futures Brokerage Division offering brokerage services to individual investors, professional traders and institutions. [more] |
Get daily research letters from Phil Flynn of Alaron FX
Phil is one of the world's leading energy market analysts, providing individual investors, professional traders and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide. Now you can get this highly sought after analysis with your daily research newsletter from Phil Flynn. Learn more about this complimentary offer and sign-up today.
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OPEC's Last Stand
Do you remember when the oil crisis ended? No not the one inspired by the oil embargo in the 1970's but the supposed oil crisis we have been having right here and now. The historic drive in oil prices has taken the energy complex on an astronomical price journey that has caused many to declare we are in the midst if a new energy crisis. Fears of demand out stripping supply and record high prices have caused a rash of doomsday predictions that were down right scary. But as ominous as those predictions have been there are some that now believe that the way oil prices seem be dropping that the new oil crisis may have actually ended last week.
And indeed oil prices have been plummeting. That same oil that soared to nominal all time highs of over $7800 barrel just weeks ago has now has fallen below $7000.
The talk of $80 or $100 barrel oil seems to a bit quaint and out of place as the bears have seized control of the complex and have come out of the woodwork. What a difference a couple of weeks make! All of a sudden we are seeing the unstoppable when we see oil market struggling to find support below $70 a barrel! And now we have predictions of a market collapse of epic proportions. In fact the recent drop in oil has caused many to ponder especially those in the industry whether finally the bull market in oil had finally run its course! In fact even some oil market bulls many to ponder whether the oil market buying party has ended. |
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Indeed the market action has been downright scary. The recent collapse in price was lead by what was a total washout in the unleaded gasoline market. Early driving season panic in the gasoline market was replaced by panic selling. Gas prices that rallied on fears of shortages of ethanol as opposed to MTBE and hobbled refineries have eased as near record imports of crude and unleaded gas and ethanol rose to the occasion. Record high prices for gas attracted supply and raised supplies above the five year average and now with summer a distant memory the thinking is that we will continue to float in gasoline supply as the winter blends take hold.
Ah yes, gas and crude inventories are rising at a time when demand slows on a seasonal basis. Could we be planting the seeds perhaps for a huge market collapse? Well maybe I am not the one to ask; perhaps the one to ask might be our little friends in the OPEC cartel.
OPEC Production has been soaring helping to add the rising oil inventories. OPEC Production rose 60,000 barrels per day in August led by rising supply from Nigeria and Venezuela. OPEC out put rose to 29.92 million barrels of oil a day and accounted for more than a third of the worlds oil supply. Inspired by high oil prices and a desire to replace oil lost from the Prudhoe Bay reserve OPEC has squeezed out just every available drop of oil they could muster. But seeing the dramatic drop in price and able to read inventory numbers as well as you or me, will OPEC stand by and continue to pump oil like mad as prices falter? Has the OPEC cartel suddenly lost its fear
of creating an oil glut and driving prices down? I mean come on; you don't think the brain trust in the Cartel has heard the rumors of a softening economy? You don't think that OPEC is trying to assess the impact of that dramatic new oil source discovered by Chevron, Devon and Statoil in the Gulf of Mexico. The find that was the biggest new oil find in the US in the last 50 years, the one that just added anywhere from 15 billion barrels to perhaps as 30 billion barrels of oil increasing our nations proven reserves by anywhere from 50% to 100%. Will OPEC who has become very accustom to $70 a barrel oil just pump idle by as they see the oil parade pass them by? |
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To be honest with you, I doubt it. Despite the recent comments by the cartel, I think if you read between the lines I think they are worried by the magnitude of the recent price crash and the mounting oil inventories. I think they will try to find a way to trim back production either officially or off the record. As deep down inside they may be waking up to the fact that if they don't act to take oil off the market it may be too late to control the market down the road. They may fear that this indeed could be their last stand to keep oil prices at what they think is a profitable level.
Yet Does OPEC have the Discipline to reign in production. One of the secrets of OPEC success was that in the early part of the decade was that the cartel learned to be disciplined on production cuts after years of downright cheating. $10 a barrel oil will do that to a person. OPEC was a success in helping turn around the oil market along with help from growing demand in China Yet in recent years due to explosive demand OPEC has not really had to show restraint. And after years of pumping oil to their hearts content, can they actually find the guts and fortitude to turn down the spigot?
OPEC has with the exception of Saudi Arabia have been allowed to pump as much oil as they possible can. Can the Saudi's tell Hugo Chavez to cut back on production, just as soon as his country got up to quota?
OPEC also must realize that they better make hay while the sun is shining. The pressure is building on OPEC as we speak. If it isn't rumors of slowing demand its new huge oil discoveries in the Gulf of Mexico or the growing competition from alternative fuels. OPEC may feel a need to cut production before it is too late. |
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OPEC may also fear that if they cut production they may lose market share because you see in the world of oil production it isn't always market share and share alike. The world's largest oil producer is no longer in the OPEC cartel but in a place called Russia. OPEC admits according to its own data that Russia has become the world's largest crude producer. In fact Russia seems to be producing 46,000 barrels a day more than Saudi Arabia and even if those changes at some point it should be a concern for the cartel. In the early part of the decade friction between OPEC and Russia was heated as they battled for a bigger chunk of market share. Those battles simmered down
as it soon was found that there was enough room for everybody. Yet if OPEC fears a marked slowdown in demand or a big drop in price, it will expect that his Russian comrades will pitch in to help support prices. And if the Russians say "NYET" we could see some trouble.
OPEC has a lot on its mind. And Despite tough talk, I have yet to see a $10 correction in the price of crude that didn't bother someone in OPEC. In Fact it seems that in recent years OPEC has almost always threatened cuts after this type of correction. OPEC can't be so intoxicated with the price of oil that they wont even consider pulling back some supply. If they don't it means that they have totally changed their strips or are oblivious to what is going on around them. As the September 11th date of the OPEC meeting comes closer, OPEC will have a lot to think about. Not the least of which should be the bad taste and insensitivity of choosing the fifth anniversary of
the September 11th attack as the date of their meeting. There is one thing that no one will ever accuse OPEC of and that is having class. |
About
the Author
Phil Flynn is Vice President, Energy and General Market Analyst with Alaron Futures and Options and is one of the world's leading energy market analysts. Phil heads the Alaron Energies Futures Brokerage Division offering brokerage services to individual investors, professional traders and institutions. Phil provides up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide.
Phil and his energy team were one of the first to predict that global crude oil prices would exceed $30/barrel in the year 2000, a correctly predicted market milestone that has highlighted the economic scene in the new millennium. Phil also called the rise of retail gas prices in 2001. Most recently, Phil Flynn has again accurately predicted that global crude oil prices would reach close to $40/barrel ($39.99/barrel) in 2004. Through hundreds of media interviews, Phil Flynn and Alaron Futures and Options have become familiar names in living rooms and boardrooms worldwide. The world's print, broadcast, online media and small businesses have come to rely on Phil's
accurate and animated forecasts, analysis, speculative and hedging opportunities. |
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Get daily research letters from Phil Flynn of Alaron FX
Phil is one of the world's leading energy market analysts, providing individual investors, professional traders and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide. Now you can get this highly sought after analysis with your daily research newsletter from Phil Flynn. Learn more about this complimentary offer and sign-up today.
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Disclaimer
The Commodity Futures Trading Commission has asked us to also advise you that trading futures is not without risk. While there is opportunity for incredible wealth building, there is also the risk of losing even more than you invested. Of course, that's not unlike most other businesses. But informed traders are the best traders! Opinions expressed by Fast Break authors are not those of FutureSource.
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When you are in a hurry to buy in a market at the high, remember not to be afraid to buy back in when it breaks back to the lows.
-Phil Flynn
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