Over the last several weeks, we have discussed many of the influences on the price of crude oil and natural gas from around the world. We discussed seasonal influences and we discussed competitive influences between OPEC and many of the energy producing nations. But, we haven’t discussed competing issues within OPEC itself and how that might affect US crude oil prices. It’s not been very long since Iran and the Saudis teed-off on each other, but this time it’s different. This time they’re arguing where they will do battle, as if it is a foregone conclusion that they are heading to war. Whether Iran and the Saudis, or Iraq or who ever, it doesn’t matter; just saying it causes the world’s oil outlets to pucker! This is why US energy independence matters.
Energy independence for the US is the only path to stabile and sustainable prices in the West. With the volatility in the price of crude oil over the last 40 plus years, it’s obvious there is no clear and identifiable path to drive the energy complex to a stabile and profitable range. That range today has been defined by analysts as between $45 and $55 per barrel. To that point, look at the chart below showing the spot West Texas Intermediate (WTI) crude oil prices for the last 70 years.
This chart shows the volatility in the price of WTI beginning back in 1974, at the beginning of the OPEC oil embargo. The action by OPEC created such a furor, they learned very quickly that using the threat of another embargo had as much influence on the price of crude oil as their initial actions did. It began an era that created spikes and crashes over the next 43 years, and it continues today. Think about it, all it took for the price of crude oil to double off its low in February of 2016 was a speech or two by the Saudi Oil Minister and OPEC’s Secretary General, and the hope of a production cut. The markets were so hungry for news that they bit hard and prices responded, even before any cuts took place.
Markets Are Conditioned to React
What’s happening here is this, with every word from OPEC, the market moves because the market can’t determine a true fundamental from what is reported to support a particular position. So, it appears to us, with the wild talk within OPEC, about where the “Ultimate battle between the Shiites and the Sunnis” will be fought, may just be more “talk” designed to support the price of crude oil. Even with shrinking inventories and more US production, prices will respond because we are conditioned to react to what is said by OPEC and the Saudis.
You have to be asking yourself, why does OPEC have such power over prices? If you look back over the years, you will notice that OPEC has been very slippery, darting about between price protections and market share protection, and they were thought to have the bulk of world’s retrievable crude oil and natural gas resources at their finger tips. It was their “ace in the hole”. Today, with the new discoveries in and around the US, OPEC’s “Ace” isn’t very valuable any more, since the game has changed. Today, it’s time the US takes back the responsibility to protect a pure market equilibrium. We need it, the world needs it and OPEC will surely benefit from it once they realize manipulating market forces does not guarantee profits.
What Do We Really Know About Oil?
The markets have gotten so overloaded with market fundamentals—some actual and some contrived—that prices have gone stagnate. Beginning last summer, the financial press was bombarded with fundamental tidbits to the point of becoming paralyzed to their effects. Technical factors were not sufficient drivers and all of a sudden, we’re stuck in a channel. See Spot WTI price chart below.
While this graph looks to show stability, it doesn’t! The graph shows what we call in economics, “discovery”. Discovery is the point of equilibrium between supply and demand, after washing out all the fundamentals and technical factors in the market; we discover what the true breakeven cost for crude oil really is. It appears to be somewhere around $45 to $47. The impact of two nations positioning themselves against the other within their own cartel has finally cost the stability and trust for OPEC around the world. They have lost control of the market after working so hard to manipulate it!
Here’s what we have learned. First, we learned that after 40-plus years of trying to manipulate control of the world’s crude oil prices, OPEC has finally overplayed their own hand. Secondly, they took for granted their own power, which was based in the thought that they controlled the biggest share of provable crude oil and natural gas reserves. The third and final item we learned from our research was the US now has the power in their hands to help stabilize world energy prices, because we now have the biggest share of proven reserves.
I have also learned a valuable lesson here and that is this: as an economist, a once proven fact, or even what is believed to be “settled science” or fact, can change. OPEC was supposed to have the largest crude oil reserves on the earth; until they didn’t. Traders guard against a market certainty or sure thing because the quickest way to go broke is to accept something as settled when it isn’t. The problem is, most of the time we don’t know that we don’t know. Markets have a way of proving how wrong we can be. If we look at the climate debate that is raging across the world through this same prism under the moniker of “Settled Science”, you have to ask yourself, how long before this supposedly “Settled Science” is reduced to dust and discounted as just another politicized scientific myth designed to manipulate a market? This is the very reason, the US needs energy independence.
By Tim Snyder
Read More from Crudefunders
- Who Is OPEC and Why Do We Care?
- OPEC Appears To Be Delivering On Production Cuts, So Why Aren’t Prices Rising?
- When Times Get Tough in the Oil Patch, Amazing Things Can Happen…
- Crude Oil Production & Supply: Have We Made Any Actual Progress in A Year?
- Innovators Make a Difference in Oil and Gas!
- Geopolitical Risk and Its Effect on the Price of Crude Oil
- What Can We Learn from Crude Oil’s First Quarter Report Card?
- Crude Oil: What is the Future
- How Crude Oil Prices React to Geopolitics
- Prices at the Pump Are Rising: Is It Seasonal or Something Else?
- Is Ethanol Worth the Fight?
- What Are OPEC and the Saudis Up To?
If you want more information on the energy markets and what is making prices move every day, go to our website www.crudefunders.com and scroll down to where it says “Subscribe”. There you will find our link to the daily commentary “Energy Wise”, a comprehensive piece that includes both fundamental and technical analysis of the day’s energy markets and provides you with the detail that you need. For more on Energy Economist Tim Snyder and his company, go to www.matadoreconomics.com.