OPEC: Probably The Worst Cartel In The World by Zak Mir

It is now over 40 years since OPEC had its most high profile moment – the Oil Embargo in the wake of the Yom Kippur War of 1973. That was my first memory of the financial markets and geopolitics, along with the Three Day Week, power cuts and over zealous trade unions.

The stock market and the economy collapsed in ‘73, and the West effectively made sure it would not be held to ransom in the same way ever again. Essentially, the OPEC action all those years backfired – just like the miners bringing down the Tory Government in 1974.

Fast forward to 2014 and we see the antithesis of the Oil Embargo with what is billed as OPEC maintaining production in order to put the new shale producers out of business. Unfortunately, it could very well be one of the worst examples of anyone shooting themselves in the foot economically since Vladimir Putin’s escapade in Ukraine.

The problem with the cartel formerly known as OPEC is that it is not really a cartel anymore. Advances in technology and shady regimes and fiefdoms all over the world mean that oil is being dumped on the market. Even worse, the U.S. dollar is soaring, and demand from leading economies is no better than flat. Given that not even ISIS or Mr Putin have so far been able to get black gold to trade higher, only something of rather horrific specifications now looks to have the power to get this market higher.

But the problem for OPEC is that having shot its bolt so successfully in the 1970s, its hand is now permanently revealed, and it is unlikely that this state of affairs may end soon. Unfortunately, just as a boxer attempting to tire out his opponent can suffer long term damage, it could very well be that this is the same story for the big oil producers.

A look at the price action of crude oil over the past 15 years will reveal that it is essentially a market which occupies two main trading zones. They are either $80 to $120 plus or, sub $40. Perhaps the most interesting anomaly is the way that the flip between the $80 plus ranges and those below $40 can be very quick indeed – an “ice risk effect”.

This is something which I anticipated going into November – but as is often the case with the biggest calls, they can be quite difficult to believe. However, with OPEC essentially “going for broke” it could very well be that we see sub $40 early in the New Year. Of course, only back above $80 very quickly, as soon as the next few weeks, would really change the prediction.

Perhaps the real issue in terms of the latest events in the world of OPEC is that it is never likely to be the force it once was, especially as most of its members remain happy to squander its riches amongst a ruling elite. This is in contrast to many of the other cartels (and effective cartels) we still have in existence closer to home.

For instance, even though it is still under collapse the UK supermarkets sector still operates a cartel – just ask its farmer suppliers. Even better, the UK banking sector remains a cartel which is open to new “challenger” members to join in the 3% over base mortgage rates. Perhaps it is the threats which both of these groups have (amongst many other sectors) which mean that leaving the EU (and the easy access which its banks and supermarkets have had here) may now be on the cards.