After running from a low of $43.76 to $51.13, the price of oil is coming under pressure just days ahead of the May 25 OPEC meeting. Since OPEC is composed of 13 countries and produces about 40% of the world’s oil production, this meeting is important. However, OPEC doesn’t have the ability to manipulate world oil prices like it did years ago.
According to Bank of America, the oil cartel could decide to 1) cut production beyond the 1.2 million b/d and urge others to deepen cuts, too; 2) increase oil output aggressively and restart an oil price war; or 3) keep the cuts at current levels for the next six to nine months, hoping that supply-demand rebalances.
OPEC’s secretary general has noted that an agreement is building around a nine-month extension. The Saudis have reportedly voiced support for this, as well.
That’s all in an attempt to rebalance the supply-demand scenario.
Unfortunately, it may take a lot more than an extension to ever see a balance.
In fact, just this week, President Trump proposed opening up areas of the Alaska National Wildlife Refuge to drilling, which reportedly holds 12 billion barrels of oil. Should that be allowed, the world would face further over-supply issues.
The White House is also proposing that we sell half of the U.S. strategic oil stockpile over the next 10 years, which many fear could add to the existing glut. Then again, some analysts argue that such a proposal would only equal 94,000 bpd (barrels per day) over that time frame.
For some perspective, global daily oil production is 96 million bpd, so 94,000 bpd is a drop in the bucket.
At the same time, though, new production from Canada, the UK, Norway and Brazil could weigh on prices, too. “Canadian and Brazilian production gains are a factor that people seem to overlook,” said Doug King, chief investment officer at RCMA Asset Management, as quoted by The Wall Street Journal.
In fact, over the next five years, Canada could add up to 900,000 bpd, while Brazil could add as much as 1.1 million barrels, according to IEA estimates. Considering that Brazil holds as much as 50 billion barrels of recoverable oil, we could see a great deal of supply come online.
On top of that, U.S. crude inventories have only increased since OPEC supply cuts took effect. U.S. shale output for example sat at 5.2 million bpd in May 2017, as compared to 4.5 million bpd at the end of 2016. In short, that additional 700,000 barrels quickly replaced much of the oil cuts delivered by OPEC.
Even offshore production in the Gulf of Mexico hit a record, bringing total U.S. output to about 9.3 million bpd – the highest since mid-2015.
While any further news from OPEC would be welcome by oil bulls, the increasing crude oil supply will keep oil prices low and cause OPEC to have even less influence over the sector.
However, that doesn’t mean we don’t see opportunity in the oil patch. As some companies become greatly oversold, we’ll look for a few investing ideas for The Cheap Investor.