OPEC's proposed production cut is looking less like it'll come to fruition with each week, and the markets are quickly losing faith that it'll actually happen.
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In this clip fromIndustry Focus: Energy, Motley Fool analysts Sean O'Reilly and Taylor Muckermanexplain why so many individual players in the cartel aren't playing nice with each other, why relatively small cuts keep being hotly contested, and some takeaways for investors who are thinking about buying into the sector in this climate.
A full transcript follows the video.
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This podcast was recorded on Nov. 1, 2016.
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Sean O'Reilly: Before weget into the big news of the week that involves a $30 billion check,we ought to talk about OPEC shenanigansreally quick, because that's what we've been known for the past month. Why are the OPEC kiddies being mean now?
Taylor Muckerman:Well, they met last week to try and drum up an idea ofwhat they wanted to agree upon on Nov. 30. All over the weekend,people were talking, "Oh, yeah, they reached an agreement." But then,it comes out that Iran, Iraq, Libya, Nigeria, they'restill on the fence about it because they want tocontinue to raise production since they've either beenunder sanctions or had civil strife going on, so they haven't really beenproducing what they think they can. So, all four of those countriesseem to be in agreement thatthey might not want to be on the hook for a production cut, leaving the other nations to take the full brunt of the supposed cut. The markets don't really think it's going to happen.
O'Reilly:They weresuspicious from the beginning,even a month ago.
Muckerman:Yeah. I mean,this has happened before, quite recently, where OPEC said, "We'regoing to negotiate a cut," and nothing happens. We're in the same boat again, waffling, continued waffling. Youlook at a bunch of investment banks out there,and they're saying that they would not at all be surprisedif this doesn't go through and thenoil could crash back down to about $40 a barrel.
O'Reilly:On the other hand, I have noticed -- youremember two weeks ago, Russia was like, "We'retotally in on a cut,"and the market loved it, and oil went up. Then, this past week, Russia is like, "Eh, we don't know... " Is itpossible that a lot of thisis just a negotiation tactic? It's a poker game, and they're all at the table.
Muckerman:Yeah,no one wants to show their hand. These are countries, that were talking about, that rely very, very, very,veryheavily on oil and natural gas sales to support their government, to support their people. It'snot exactly just a few companies going bankrupt. You're talking about countriescould go bankrupt if they don't support oilprices, or support their own internal production and exportation. So, yeah, thiscartel has many more perspectives than just the sole cartel.
O'Reilly:Cartels encourage cheating. That's thebeauty of a good old-fashioned cartel. However, on the other hand,I just never understood why these guysdon't seem to care aboutwhat you learn in Econ 101, about cost benefit. Like, you decreaseproduction by 4%, and do you make doublethe money on the other 96%. What is the problem here?
Muckerman:Well,that all depends on who else is producing. They thought they were going to shut U.S. shale down bycollapsing oil prices. Shocker --
O'Reilly:We have technology.
Muckerman:There were somebankruptcies, but nothing uber-meaningful. In fact,the companies that declared bankruptcyare just about producing the same amount, if not more, than they were while --
O'Reilly:Theykeep on operating, chapter 11,or they sell their assets, run something stronger, yeah.
Muckerman:Yeah,exactly. Just because they declare bankruptcydoesn't mean they're not producing oil. So,as the prices continue to creep back up,it's much more likely that they will emerge frombankruptcy still producing oil. So, yeah, you look, in avacuum, sure,they should cut productionbecause they're producing at record levels. But if they do cut production, somebody's going to fill that spot,just like they did in 2014 whenSaudi Arabia was like, "Yeah,we're just going to start pumpingjust to pumpbecause we can." You look at all these wells that are drilled anduncompleted in the United States, nearly 4,000, those arestarting to come back online. Inventory is out there.
O'Reilly:Lots of fun. And we'll know more in a week, I'm sure.
Muckerman:Yeah. You'llcontinue to hear more about it for the next month. Personally, I think thatif you invest in oil right now,you have a little bit more downside than you do upside at the momentbecause if they announce it and they say, "Yeah,we're going to announce this cut," they'reproducing at record levels, they're not really cuttinga whole heck of a lot, and that gap can be filled. If they don't say they're going to cut, then you still have this outstanding supply,and you have the downside risk.
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