OPEC- Transparent or OPAQUE

Finally, the end of the year has begun with Dramatic December. I am sure all you jokers had a great year, well you can say that because you are not Crude Oil. Let me read you a page from Crude Oil’s personal diary.


Date- Ultra Pathetic Year                                                                                   Place- Rock Bottom


Dear Diary.

I got the news from the office today. The appraisal meeting I was excited about flushed into gutter. They want me to work 31.8 million times in a day which is more than my usual working hours and I am paid half from last year. And it gets worse, some guy named Goldman told me that my pay can get reduce to $20.


When they started calling me Crude, I didn’t say anything. I thought it was kind of cute. Later, I realized that it is not used in a polite way but it was too late for a change in name. For me, the most important thing was that they valued me and respected me. They gave me so much attention during Syrian and Libyan issues. They promoted me from “A Commodity” to “Geo- Political Commodity”. And just in 1 Year I am being asked to wait late nights with no work to do. It seems I expected too much, anyways, gotta go. I am going to Brents’ for dinner. Now when he just lives 2 blocks away at least we can eat together.


Yours Leaking,

WTI


Very touching right? Well, what i really wanted to convey was that Friday’s OPEC Meeting was a total bust. When the 12 members meeting kicked off in Vienna, everyone had their eyes on any hints on output cut. Instead it was decided to raise the output ceiling to 31.5 million barrels per day which was more of a solid statement on maintaining the current output of 30 million bpd.

The Crude Oil prices have fallen to $45 from $115 in 2014. The countries like Venezuela, Brazil, and Nigeria etc. have been hit majorly by the decline. The Oil exports accounts for 96 percent of the revenue for Venezuela which is why the economy has fallen down 10 percent with 124 per cent of inflation. They proposed a 5 percent reduction in the total output to which Saudi Arabia- the largest oil producing member agreed also. But with a condition that Non OPEC members like Mexico, Russia etc. would also reduce their production. We know, that is not happening so things are back to equation one.


It was an irrelevant meeting to state the obvious. However, the unchanged output was being justified on the fact that Indonesia was returning to join OPEC again plus Iran aims to supply at least 500,000 bpd if the western sanctions remain lifted. But we all know what it is really about. Saudi Arabia will not restrain the production quota until United States does. Saudi, being the largest producer has pretty much control over the decisions taken by OPEC. Any decision, without Saudi Arabia’s consent is similar to peeing in the wind.


Saudi Arabia generates revenue of 785 million dollars because of their current production capacity and low oil price. Its decision is backed by strong members like Kuwait, Qatar and UAE. The members planned to meet next year in June again to decide on the production quota. I bet they would meet earlier, given the present scenario. It is surprising to see that Shale drillers have continued to held on till now. Well they are not the only one surviving, Russia has also been producing 10 million barrels per day but in their case, the Russian rouble has declined almost 50 percent.


While doing my research, I found out the Fiscal Break Even Price of some countries which proves the need to reduce the current oil supply. The Fiscal Break Even Oil Price is the average price of the Crude Oil which is needed by an oil exporting country to balance its budget in a particular year. In human words, get the fact that if the Fiscal break-even price is higher than the market price than the budget cannot be balanced. Below are the break-even prices of some countries:


Bahrain- $120

Saudi Arabia- $100

Nigeria and Venezuela- $90

Russia- $80

Comments from the Joker

Do i need to say anymore? It is now a wait and watch game after the OPEC members failed to take any measures last week. The projects have either been cancelled or being put on hold. Obama’s climate talks in Paris have also emphasized on reducing dependency on Carbon fuels, ironic isn’t it?


The WTI crude slipped almost 2.5% breaking $40 while Brent was down almost 1.8%. After looking the Fiscal Break Even data it seems that the bearish momentum of oil would stop soon. Also, the oil rigs count fell to 545 from 1034 last year. But then we dig deep down the financial crust and find crude facts such as:

  • Strong Dollar- Amazing job reports and continuous appearances of Yellen has made December rate hike – a main event. With overvalued dollar and humongous supply, crude oil prices will be tested.
  • China Chilling- While Chinese economy is being kungfoo-ed down, the demand for oil has not been same. Although China has renewed its oil purchase deals with Iran but it is required that the Chinese economy should fight back with HAIIYAAA!
  • Friend becomes Frankenstein- A growing amount of disunity among the OPEC members would not be good for the Oil Price. There is no certainty on the fact that if OPEC cuts output then Non- OPEC members would not cheat with their production quota and raise it to capture the market share.
  • Supply Glut- As per an internal OPEC document if the production remains same then the oil market will be oversupplied by 700,000 bpd in 2016.

Will the fight between Saudi and Shale ever come to an end?


Will OPEC maintain the same output?


Will the price of natural gas be more lower?


There is only one way to find out…Follow the TRADE JOKER


All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site.

 

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