***Note: This was written on Tuesday but SOMEONE forgot to press “publish”… My apologies!***
I step away from the oil market to talk about something else and you people go crazy. I can’t leave this blog for ONE minute without you all losing your minds!
Yesterday, I blogged about the Kabuki theater that will be the nomination fight for the new Supreme Court justice. The thing I wanted to blog about was the ridiculous upward swing of oil prices… But, again, I was caught flat-footed thinking that it might be fodder for another day.
You see, on Friday – and again on Monday – the market went bananas because an oil minister said that there might be a meeting between OPEC and Russia. Pay no attention to the fact that the oil minister in question is from the UAE – one of the worst offenders in the current glut (by increasing production over the preceding 12 months). Nothing to see here! I’m absolutely sure that any comment coming from Minister Al Mazrouei is totally genuine.
Today, however, reality set in. Russia announced that the agreement was to… wait for it… MAINTAIN production at the current levels.
There’s only one problem… Current production is adding to the surplus at a rate of 2 million barrels per day. Understandably, the markets turned sour on this announcement… Oil immediately lost its gains, plus another 0.5% – and, if I were you, I would prepare for more.
As you may remember, I’ve been shilling for the The Price of Oil, by Doctors Aguilera an Radetzki. (A smarter shill would get paid for his contribution, but I digress.) In it, the authors argue that the price of oil will continue a long-term downward trend.
One reason is because EVERY producer produces absolutely as much as they can all of the time. More artfully, over the long term “(output) has simply equaled capacity.” In other words, the main reason prices went up was disruptions in supply. Prices go down because new supplies came online – not because of some problem with demand.
Yet many “experts” keep citing weak global demand as the culprit. This is undoubtedly a very small factor in short-term price reductions. The real problem, as argued by Aguilera and Radetzki, however, is that every time we measure known oil reserves, we find increased supplies in relation to prior assessments.
In fact, the existing known global reserve today exceeds the predicted known reserves from 100 years ago… which means, at best, we have used less than half of the total global supply of oil in the last century… AND, this estimate only calculates known reserves based on today’s technology.
Let us not forget that we are only in the early stages of the “fracking boom”, which is currently situated almost exclusively in the United States. The Saudis, to cite one example, have not explored that technique because they’re producing enough with conventional methods. One can only imagine the difference if they change their minds.
Just remember, the next time you see the price of oil shoot up by 12% in a late week rally, the dumb money is calling the bottom. Whenever there is any change in price, expect a surge in supplies to immediately follow.