This article was published by The McAlvany Intelligence Advisor on Friday, March 10, 2017:
The tsunami threatening to sink OPEC into oblivion began early Tuesday. At the time, crude oil was selling for $54 a barrel, with expectations that the price would move higher. Those expectations were reflected in the highest ratio of longs to shorts that the Commodity Futures Trading Commission had seen in ten years.
And then came the announcement from the American Petroleum Institute that domestic crude oil inventories rose by a whopping 11.6 million barrels the previous week, against expectations of an increase of just 1.6 million. The selloff began, pushed along on Wednesday following the report from the U.S. Energy Information Administration that
domestic crude oil supplies increased by an unexpected 8.2 million barrels – the ninth weekly increase in a row – bringing the total to 528.4 million barrels, an all-time weekly record.
The tsunami gained more momentum with comments from Saudi Arabia’s energy minister, Khalid al-Falih, speaking in Houston on Wednesday, that led many to believe that he also was caught by surprise: “We see the green shoots of recovery in the [global oil] industry. The green shoots are here in the U.S.,” adding “Maybe they’re growing too fast?”
Bulls weren’t helped any either by comments from Harold Hamm, the billionaire founder and CEO of Continental Resources, who told the Houston oil conference that U.S. production growth “is going to have to be done in a measured way or else we’ll kill the market.”
By the end of Wednesday, the price of crude had dropped to $50 a barrel, and the selloff continued into Thursday, with early indications that closing prices below $49 a barrel were likely.
Market psychology has changed, said Ole Hanson, head of commodity trading at Saxo Bank:
The market psychology has changed, with the longs now looking to reduce [their positions] or get out [altogether]. They were looking for a bounce to sell into, but as it failed to materialize, they resumed selling.
Some short-term buyers looking for a bounce stopped themselves out once [crude] broke below $50 [a barrel].
This wasn’t supposed to happen, of course. The phony oil agreement OPEC put together in November was full of holes from the beginning. It granted exceptions to two of its members that needed funds to pursue various military adventures, while others boosted production immediately before the agreement was to begin so the reductions agreed to wouldn’t hurt so much. And those 11 nonmembers? Their compliance came in at around 40 percent.
That the agreement was not only phony but useless was pointed out by Professor of Energy Policy at Oxford, Dieter Helm, who thinks they should sell all they can while the price is still high:
For the [oil producers] in the Middle East and elsewhere, increasing production is quite a good idea because [they’re] going to need the money and [they] might as well get the stuff out of the ground now rather than later….
OPEC may have cobbled together something for six months – in my view, relatively ineffectively – but this is a temporary dam and it is very, very likely that it will fail.
In theory, the agreement was supposed to boost the world price of crude to levels that would reduce the need for members to go into debt to fund their own military commitments and welfare states. For a few weeks it looked like it might work: the price of crude topped out in early January, but it had declined by nearly 15 percent by Tuesday.
American technology is simply overwhelming attempts by OPEC to change the direction of oil prices. Much has been written about how that technology is not only allowing idle rigs to be put back into service more rapidly, but how those rigs have become vastly more efficient. These improvements continue to push down the break-even points for American oil producers, a battle that OPEC is doomed to lose.
In addition, the use of electric vehicles (EVs), autonomous vehicles (AVs), and drones and robots continues to reduce the demands for energy for transportation needs. Already there are self-driving over-the-road trucks being tested with expectations they will be operational in less than two years. Drones are delivering pizzas and new six-wheeled robots are delivering hot meals in test markets around the country.
The selloff this week signals the death knell for sand people who thought they were still able to control the price of crude oil.
MarketWatch: Oil prices drop over 5% to end at 2016 low
MarketWatch: Here’s why U.S. oil data should rattle OPEC nerves
MarketWatch: This is where the real risk for oil prices kicks in
MarketWatch: Oil baron Harold Hamm warns this one thing could ‘kill the market’
The Wall Street Journal: Oil Posts Biggest One-Day Decline in 13 Months
MarketWatch: Oil breaks below $49 a barrel for first time in 2017 in sudden selloff
MarketWatch: OPEC’s strategy to buoy oil prices is all wrong, oil economist says
The Wall Street Journal: Saudi Energy Minister Says OPEC Will Remain Stabilizing Force for Oil Prices