Oil traders handicap OPEC’s move with a wary eye

Global oil markets are tightening a lot faster than people had anticipated and the world is going to look to OPEC Plus to make up the difference. 

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The problem is that they probably won't. 

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OPEC Plus is going to have its meeting on July 1st and with the way things are going for oil prices, OPEC, along with its co-conspirator Russia, will probably be slapping high fives given the way that they have regained control of global oil prices.

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The cartel seems to be less concerned about the impact that higher oil prices could have on the economy and more concerned with making back lost revenue from the drop that they saw due to COVID-19 shutdowns. Falling global oil inventories, and market structure suggest that the world needs a lot more oil. Yet, OPEC is sending signals that while they plan to increase production, it probably will not be enough to meet the demand the market is calling for.

Falling global oil inventories are a big concern. Oil supplies have plunged in the last five weeks and are now 6% below the average range for this time of year. If you look at the structure in the oil market, it is telling the world quite clearly that it needs more oil production and it needs it now. Yet the OPEC Secretary-General Mohammad Barkindo says that there is still significant uncertainty in the oil market. He is calling for "prudence" as he points towards the different variants of the COVID 19 plague.

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Yet at the same time, Barkindo acknowledges that oil supply in the OECD countries is below the 2015 to 2019 average and he even acknowledging that oil demand is going to be 5,000,000 barrels more in the second half of the year than it was in the first half of the year. Yet the problem is OPEC Plus is only talking about increasing production by 500,000 barrels a day to 1 million barrels a day. So if demand indeed does rise by 500,000 barrels a day more in the second half of the year, the world is going to need a lot more oil to offset declining global inventories.

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Saudi Arabia and Russia have put aside their differences as they celebrate a new era of rising oil and gasoline prices. If you remember they were at odds when the COVID-19 plague started to impact oil demand. The two wound up in an oil production war that played a part in oil prices falling below zero. Now it appears they are on the same page as they boldly conspire to drive up oil prices and line their pockets.

They also are celebrating the lessened threat from the U.S. shale industry which at this point, has failed to respond to higher prices. In recent years it has been the U.S. shale producers that have kept the cartel and Russia in check. They did it with innovation and by increasing production when the price increased and not allowing OPEC and Russia to bleed the economy by reducing supply. A year ago, U.S. oil production was 12.311 million barrels a day yet now our production is at 11.11 million barrels a day.

U.S. shale oil production has been restrained in part by a new philosophy of fiscal restraint but also because of an anti-fossil fuel mantra from the Biden administration making it harder for producers to raise capital or get permits to drill on federal lands. Weirdly they have become a willing accomplice with OPEC to drive global oil prices higher. Countries are investing less in fossil fuels and trying to invest in green energy but that is the only success in putting more money in OPEC and Russia's coffers.

Oil-consuming countries are bearing the brunt. India, for example, has been trying to pressure OPEC into raising production, blaming OPEC for runaway inflation in their country. 

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The Biden administration for their part has taken a more silent approach. The problem is that in recent years with the rise of U.S. shale oil production, the U.S. was on the verge of being known as a producing country and not a consuming country. Now because the U.S. is retreating from fossil fuel investment, it's very possible that we are going to be viewed as an importing nation and a consuming nation. 

We are now more vulnerable to what OPEC Plus decides. Our economy is already feeling the pain of higher gasoline prices which hit a seven-year high this week. 

The Biden administration has neutralized the U.S. shale industry. U.S. shale producers are not adding rigs at the pace that they would have in past years partly due to financial discipline but also partly due to signals coming down from the White House. If shale producers don't add rigs, then production and existing wells will fall because you need more drilling to replace declining production. The Biden administration's drilling moratorium on federal lands was not helpful in this respect.

The Biden administration's growing threat to the approval of pipelines is also causing the pullback of investment by oil producers very much concerned that if they can produce oil they might not be able to ship it at a reasonable cost. 

All of these things are conspiring to make us more dependent on OPEC Plus and Russia. OPEC Plus of course, is more than happy to regain control of global oil prices and do what they think is best for the market and themselves as opposed to what the market is telling them to do. 

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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.