OPEC Head Fake
The Wall Street Journal reported today that oil prices continue to rally based on the news that OPEC has reached some kind of deal to reduce supply. We have seen this movie before and the report should be the last reason for a bullish move in oil. Two reasons mentioned in the article:
- OPEC has over the 40 years I have observed has rarely and never for long sustained production cutbacks. Now that Russia is reported to be part of the deal the cohesion is even more frayed. Add to that the simmering tension between Saudi Arabia and Iran and the boiling hot war in Syria, and little should be expected for this deal to hold.
- Any reduction in OPEC+Russia supply will be gladly filled by the third largest producer, USA’s shale producers. Marginal costs have declined and a sizeable inventory of yet to be completed wells is waiting. Also, expect the Trump administration to fast track the Keystone XL project and clear away any debris from the Dakota Access protest. A few of these developments will bring supply right back to where we are right now.
Unfounded optimism in oil prices continues, but it sure looks like the bigger fool theory is in play. It may work for a short period, but the fundamentals point the other way.