Oil hits $89 as OPEC stays cagey

Oil hovers at the highest level since October 2014

OPEC says one thing but they pump another, which is why U.S. oil is hovering just below $90 per barrel and Brent crude oil is even higher. 

The oil world is awaiting news from the cartel and their favorite co-conspirator Russia to announce their intentions surrounding exactly just how much oil they plan to produce in the future. It is widely expected that the group will continue upon their previously agreed plan to add another 400,000 barrels a day of oil to the world market. While that seems welcome, and it is the same amount they promised last month and the month before, the problem is that despite those promises the group has failed to deliver.

EXCLUSIVE: BIDEN ADMINISTRATION IS STOCKING HIGHER ENERGY PRICES SAYS JEC

Ticker Security Last Change Change %
USO UNITED STATES OIL FUND L.P. 81.96 -0.01 -0.01%
BNO UNITED STS BRENT OIL FD LP UNIT 32.39 0.00 0.00%

Last month they only mustered 210,000 barrels a day of increased production, falling short of the 400,000 barrels a day increase by a long shot. What makes it worse is the group has failed to hit any of the promised production increase promises the last few months, leaving global markets scrambling for supply. You see, the OPEC of old was known for cheating, as many members exceeded their production targets as they tried to hoard money and gain market share. Yet now the group can't seem to hit their production targets either because of production problems or sometimes on purpose.

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While some of this shortfall was caused by problems out of their control – including geopolitical supply disruptions in Iraq, Libya and Nigeria – they are doing little to find a workaround. 

Vladimir Putin

  (Evgeniy Paulin, Sputnik, Kremlin Pool Photo via AP / AP Newsroom)

OPEC kingpins like Vladimir Putin's Russia and Saudi Arabia have a vested interest in keeping oil prices high. They feel they can keep their market share and charge higher prices because they have less competition from the U.S. shale patch. Less competition means they have more control over prices and more incentive to restrict supply.

The market is also eyeing unrest in Ukraine as Russian forces inch closer. 

Part of the problem is that OPEC seems to be out of whack with current supply and demand realities. OPEC's Joint Technical Committee, which supplies OPEC with data, said Tuesday that global oil market supply versus demand has a surplus of 1.3 million barrels a day. While that surplus is smaller than last month's 1.4 million barrels a day, it still seems that is too optimistic an estimation based on what we have seen in recent months regarding global oil inventories.

The Energy Information Administration reported that total oil inventories in the OECD countries fell from 3.0 billion barrels at the end of 2020 to 2.7 billion barrels at the end of 2021. That, my friends, do not seem like we have a surplus but more like a global supply deficit.

Even if we give OPEC the benefit of the doubt for a minute, and let's say they are right that there is a 1.3 million barrels surplus, their numbers still suggest that there is not a lot of room for error in the global oil market. I don't think in a world where we're consuming close to 100 million barrels of oil a day that that is a comfortable cushion.

What that means is that any disruption in any part of the globe will sink us into a global oil supply deficit increases the risk of oil price spikes that could shock and derail the global economy.  That should be a major concern especially with the geopolitical environment surrounding the tensions between Russia and Ukraine and the West in general.

OPEC's Joint Technical Committee also tried to downplay the tight market by playing up the threat of the omicron variant and worries about central banks' policies of raising interest that could slow oil demand. 

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Phil Flynn is senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading 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. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com.