The late September gathering in Algiers among OPEC and a few non-OPEC member nations to trim oil production gave the crude oil market a lift.
However, I see the “agreement” as a last gasp attempt to keep OPEC relevant.
The proposal: To limit OPEC oil-production in the range of 32.5 million and 33 million barrels per day. This equates to a cut of as much as 700,000 barrels per day from the cartel’s estimated September OPEC production.
That’s a drop in the bucket compared EIA data putting third-quarter world supply at 96.66 million barrels per day.
That alone means it’s hardly enough to keep oil prices moving higher. But there’s more: The deal won’t last … because OPEC is broke!
It’s becoming clear that many OPEC members are under significant financial pressure to keep prices low. Perhaps that’s why they increased September oil production to 33.39 million barrels per day – the highest since 2008.
The fact of the matter is that they need higher oil prices to boost revenues and cash flow.
Saudi Arabia was once the world’s largest oil producer, with oil extraction representing around 45% of its GDP. The country’s desire for higher prices comes as its second-quarter growth is running at a paltry 1.4% year-over-year rate. That compares to 4.02% in the year-ago period.
Saudi Arabia faces deteriorating fiscal conditions and a growing budget deficit. This comes as oil revenues make up 90% of the country’s budget.
Then there’s Iran, who’s committed to ramping up crude oil production to recover from financial devastation caused by Western sanctions.
The worst of the lot is Venezuela, with a worthless domestic currency (Bolivar) and an estimated crude oil breakeven cost of $120.00 per barrel.
Hype over an OPEC agreement to trim oil production is too little too late.
The fact is OPEC is no longer in charge. Want to know who is?
We are.
That’s right: The U.S. has emerged as the world’s swing oil producer.
Consider …
Two-years after OPEC’s decision to capture market share, U.S. oil producers fought for survival and are now much leaner. During that time, U.S. shale oil producers lowered breakeven prices by around 35%.
This number is similar to estimates from energy consultancy firm Wood McKenzie, with the average cost per barrel of U.S. shale wells down 30% to 40%.
Drilling and completion costs are also lower.
Recent financial results from Texas-based exploration and production firm Pioneer Natural Resources (PXD) saw their breakeven costs drop 35% during the past two-years.
This makes U.S. producers more than willing to ramp up production with higher prices and expanding margins – with them eager to generate additional cash flow.
Sharp gains in West Texas Intermediate (WTI) Crude Oil over the last
three-weeks are expected to come with a notable boost in U.S. production.
But the supply glut becomes even more dire with higher oil prices.
Some insiders suggest that oil prices in the $50- to $60-per-barrel zone will incentivize more drilling activity. For some U.S. firms, it becomes profitable to drill when WTI is north of $50/barrel.
Higher oil prices also encourage increased oil production from non-OPEC producers outside of the U.S.
By some estimates, the boost in U.S. shale oil production could add 3.2 million to 5.7 million barrels of daily oil production on to the market, which pales in comparison to OPEC’s latest agreement to trim output in the range of 250,000 to 500,000 barrels per day.
That alone is enough to make an OPEC production cut irrelevant.
What’s more relevant are my AI models for oil. Take a look at the latest forecast:
Clearly, oil is at a top and at risk of a substantial decline.
My recommendation: Buy the VelocityShares 3x Inverse Crude Oil ETN, symbol DWTI, a triple-leverage inverse ETF on crude oil that seeks to profit for a price decline in oil, times three.
| Here are the details for today’s trade:
For ALL Members: Using 3% of your capital allocated to this service, buy VelocityShares 3x Inverse Crude Oil ETN, symbol DWTI, at the market. Place a good-till-cancelled protective sell stop at $50.67. |
Lastly, yesterday you should have exited your remaining shares in GLL and ZSL, for gains of up to 11.6% and 13%. You should have also gone short the stock market with DXD, a double-leveraged inverse ETF on the Dow.
I believe more gains are coming.
Best wishes and stay turned …
Larry
