Market Turns Thumbs Down on OPEC Cuts West Texas Intermediate for July delivery fell $2.46 to $48.90 a barrel on the NYMEX. Total volume traded was 70% above the 100 day average. Bloomberg News, Today 5/26/2017 7:30 AM CST Markets are the summation of multiple decisions by millions of participants. From that standpoint the market is actually a living, breathing life-form, given to extremes of positive and negative social mood. Sometimes markets can be downright prescient. This was the case for investors continually bidding up profit less Amazon for years. The market saw the end of brick and mortar dominance in retail. Now the decline in retail stocks affirms that outlook.
The oil markets in particular swing from wildly optimistic ($110 in 2014) to decidedly pessimistic $25 in February 2016). But sometimes the mood of oil investors like Goldilocks porridge, is just right. The headlines this morning suggest that oil has bottomed and that investors are disappointed that the latest cobbled together OPEC does not extend far enough into the future. I suspect the market is simply seeing the reality that OPEC never actually cuts production. Understanding this requires an understanding of what we might call ‘OPEC Speak.’
OPEC would have us believe that it and Russia and other non-OPEC producers have agreed to a production cut of 1.8 million barrels per day MBPD. Further these ‘cuts’ would be extended for nine months. This resulted oil prices for both WTIC and Brent jumping over $50. That was short lived for a few days.
Saudi Energy Minister Khalid al-Falih insists the coalitions efforts are working and that more time is needed. He dismissed the notion that expanded US Shale output would grab more market share. That comment occurs as multi-billion dollar export docks are being constructed along the Texas Gulf Coast for the explicit purpose of exporting oil and gas.
Understand that Vladimir Putin intentionally bet the entire economy of Russia on oil. Seventy years after the end of WW II, Russia, like Saudi Arabia, is not a world player in a single consumer market, other than energy. One-half of the Russian GDP is oil derived. Saudi is eve more dependent on oil revenue than Russia. In OPEC Speak, a promised cut really means, well, we will promise not to expand existing production from current levels. That is certainly what Russia means. And recall Russia is a country notorious for fudging on any and all promises.
Prince Mohammad bin Salman did pull off an impressive welcome for President Trump this past week. But a serious look at who skipped the party reveals less than a complete presence of all the necessary players. It was pretty much a Sunni event lacking prominent Shite leaders. Okay no one expected Iran to be on the guest list. But the fact that Iran is pumping all the oil it can and it not in the deal weighs on the market. Turkey’s President Erdogan was absent. Pakistan’s Prime Minister Nawaz Sharif was denied the opportunity to deliver a speech. While Saudi is the location of both Mecca and Medina, Egypt still sees itself as more of a regional leader.
So what can we glean from the markets about all this? Apache has drooped below three weekly moving averages of 50,125, and 200 bars. WTIC s flirting with its 50 and 125 Moving Averages MA. The 200 week MA is much higher at 65.05. Brent is in the same position. The XES Energy Service ETF ($16.28) has dropped below all three MAs. Any further drop here suggests a return to test the February 2016 low around $13. The ETF FRAK representing American Shale producers looks very much like XES, trading below all three of its Moving Averages. The bottom line is not just that the traders were disappointed. Rather they are seeing lots of oil and not much commitment. After all there is no enforcement arm for OPEC. At this point the oil price charts look more robust than the shares of energy or energy service companies. In pre-market trading, oil has is already down 50 cents from the Thursday close.
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