What Does OPEC Know About The Oil Price?

by Zak Mir

I have in the recent past described OPEC as the world’s worst cartel. And it has to be said, I have not been inundated with comments suggesting that this conclusion is wrong. After all, the whole point of a cartel is to manipulate prices to the upside, not drag them down 50% in three months, as we have seen in the post-autumn period.

Of course, we have been assured by this venerable organisation, or at least its spin doctors, that allowing the price of the commodity to fall is a strategy which is valid. This is on the basis that it would knock out all the fly by night fracking participants who rely on a crude oil price towards $80 plus.

The intention is that once these players have been flushed out, normality will return, with the sub $50 trading area that we are seeing at the moment merely becoming what many seem to feel it is, an aberration. Unfortunately, there may be other forces at work.

After all, €1.1 trillion of QE from the ECB is a symptom of deflation. As is the way that despite a reasonable rebound for gold over the past few months, the supercycle there gave way to a punishing three-year decline. In most countries in the West and beyond we are seeing inflation struggling to get to 1%. Therefore it may be par for the course that the price of crude oil had to realign downward in the dramatic fashion that it has.

The problem for the bull argument in this market though, is if we are seeing ridiculously unsustainable low prices, why has there not been even a token rally of merit since the nightmare began in September?

Looking at the daily chart of front month crude shows the way that it has struggled to break even the green 10 day moving average on rallies, something which is seen only in the weakest stocks and markets. Indeed, we know from technical analysis rules that even if there were a 10-20% rally from current levels, say back to the 50 day moving average at $59, it is unlikely that the bulls would be able to get back on their feet at the first attempt.

From a fundamental perspective allies of this market have also been having a tough time. For instance, everyone’s favourite strongman, Vladimir Putin has been attempting to up the ante in the Ukraine with little effect on a commodity he needs to rise in a dramatic way to save Russia from an economic implosion.

By contrast, we have seen OPEC itself also thrown its hat into the ring in a more philosophical way  in terms of what may happen to the oil price. Its Secretary General Abdalla El Badri warns that $200 a barrel is on the cards due to projects being shelved as they are perceived to become uneconomic.

This may be a correct assumption. The problem is the effect on the oil price may only be to drive it up by say 50% from present levels, to less than $70. Even if a recovery to this zone was delivered, many producers would still be crying.

But perhaps the most ominous aspect of El Badri’s comments is how little his comments had on the market yesterday. It would appear that for the time being, supply and demand is simply too heavily weighted in favour of the bears, even if this state of affairs is unsustainable.