Why the OPEC Production Cut Is Doomed

The late September gathering in Algiers among OPEC and a few non-OPEC member nations to trim oil production gave the crude oil market a lift.

However, I see the “agreement” as a last gasp attempt to keep OPEC relevant.

The proposal: To limit OPEC oil production in the range of 32.5 million and 33 million barrels per day. This equates to a cut of as much as 700,000 barrels per day from the cartel’s estimated September OPEC production.

That’s a drop in the bucket compared with EIA data putting third-quarter world supply at 96.66 million barrels per day.

That alone means it’s hardly enough to keep oil prices moving higher. But there’s more: The deal won’t last … because OPEC is broke!

It’s becoming clear that many OPEC members are under significant financial pressure to keep prices low. Perhaps that’s why they increased September oil production to 33.39 million barrels per day – the highest since 2008.

The fact of the matter is that they need higher oil prices to boost revenues and cash flow.

Saudi Arabia, once the world’s largest oil producer, relies on oil extraction to fund their economy and represents around 45% of their GDP. Their desire for higher prices comes as second-quarter growth in the country is running at a paltry 1.4% year over year rate. That compares to 4.02% in the year-ago period.

Saudi Arabia faces deteriorating fiscal conditions and a growing budget deficit. This comes as oil revenues make up 90% of the country’s budget.

Then there’s Iran, who’s committed to ramping up crude oil production to recover from financial devastation caused by western sanctions.

The worst of the lot is Venezuela, with a worthless domestic currency (bolivar) and an estimated crude oil breakeven cost of $120.00 per barrel.

Hype over an OPEC agreement to trim oil production is too little too late.

The fact is OPEC is no longer in charge. Want to know who is?

We are.

That’s right: The U.S. has emerged as the world’s swing oil producer.

Consider …

Two years after OPEC’s decision to capture market share, U.S. oil producers fought for survival and are now much leaner. During that time, U.S. shale oil producers lowered breakeven prices by around 35%.

This means that the more than 17% rally in crude oil prices during the last three weeks will usher in a flood of new U.S. supply on to the market.

In fact, by some estimates, higher oil prices could boost U.S. shale oil production by as much as 5.5 million barrels per day.

And that has OPEC shaking in their boots.

With the U.S. providing the swing supply in oil, it’s no wonder my Artificial Intelligence models confirm a topping pattern in crude oil prices, with falling prices into February. Take a look for yourself …

wave-chart

Bottom line: The OPEC agreement isn’t going to hold. Add in robust production from the U.S. — the world’s new swing oil producer — and it’s clear that oil prices are headed lower in a big, big way.

Best,

Larry

Larry Edelson, one of the world’s foremost experts on gold and precious metals, is the editor of Real Wealth Report and Supercycle Trader. Larry has called the ups and downs in the gold market time and again. As a result, he is often called upon by the media for his investing views. Larry has been featured on Bloomberg, Reuters and CNBC as well as The New York Times and New York Sun.

Comments 43

Eagle495 October 14, 2016

Can not think of a more deserving bunch of clowns.... All that money wasted and soon they will be back to herding goats along with the Russians... They can thank old Dick Cheney for bringing the Cabal together to screw the consumers..... Well, like so many market capturing scams, it backfired as billions have now gone into solar and wind and other energy generating methods.... They got greedy and now they are toast..... And along with that the risk of WW-lll with the Russians is going away, just as it did in 1987 (when thy went broke) as oil is their ONLY product for export... :)

Lor Dav October 18, 2016

Amen, I agree with you totally. Maybe we can now get back to the demand/supply equation.

B Williams October 14, 2016

Larry - I have oil related stocks that I can't liquidate for a couple of years. Should I buy reverse ETFs (crude relational) to protect against the fall? - Bill

Tom October 14, 2016

Interesting. I don't think OPEC countries will be able to cut production at all. I see the bigger factor as being demand and I don't think it is going to pick up much. It wouldn't surprise me to see oil prices retest their lows, if for no other reason them to confirm a longer term bottom.

Birdman October 17, 2016

Of course OPEC can cut. Any country can cut and the math proves its well worth doing which puts the logic test to why oil prices are so low in the first place. Let me explain exactly what I mean by that Tom. The current global surplus is between 1 and 2 million barrels per day. Saudi Arabia produces 11.5 million The US produces 12 million If Saudi Arabia cut production unilaterally by 2 million barrels daily we would see a net deficit in annual production arise and prices would immediately rebound into the 70's or even 80 dollar range if not higher. If they cut production by half (about 5.5 million barrels) then we would see crude trading back at its highs and the world would grind to a halt as recession spilled out across the entire planet. But why would the Saudis care if its only about money and their only concern is to balance the budget? You see, if they cut production in half then prices might triple and NOBODY sane would step into the fray and try to fill that deficit because it would just mean a price reduction all around. So this is the test then. Why have they not reduced production when it is obviously in their interests to get higher prices under both scenarios of a 10% production cut and a 50% production cut? Both ways benefit them if this is only about money. The only thing that hurts them is production increases so we need to ask why the smart people in the room are doing that instead of taking the alternative. So you see the current low prices really have nothing at all to do with supply or demand issues since both can resolve themselves easily. I suspect the real reason we see Saudi cranking up the volumes is to keep the dollar elevated. The only reason for doing that is so that when the Euro implodes (crashes) and starts sending the dollar soaring that the heights it goes to can be moderated by pushing oil prices back up (dollar down equals crude oil up and vice-versa). What I am saying in other words is that this whole crude oil deflation thing going on right now is artificial and manufactured but that it is also deliberate for a good reason. A soaring dollar is more deflationary than even crashing oil prices. And the way to fix a soaring dollar is to send oil prices back up. When the time is right of course.

rex willard October 14, 2016

do you offer a gold stock news letter? if so can you email me the details . thank you respectfully rex willard

ian October 14, 2016

I cannot disagree with you completely feasible,hope your right

Edward willhoyt October 14, 2016

Why would american oil producers want a lower oil price?

ROBERT October 16, 2016

I am sure they don't want lower prices, but as long as they can pump at a profit they will keep right on pumping. As Larry said they have lowered their costs, so can still profit at lower prices.

Jose October 18, 2016

Because you depend on your own raw material. Because with lower energy prices you pay less for what you buy. Check on air flight prices low as never. Because you hurt the enemy... and many other whys.

Bruce October 14, 2016

Thanks Larry, Shorted oil last Nov.-Feb., on your analysis, made a bundle. Looking to do it again Monday. Thanks, Bruce

walt benning October 14, 2016

Larry your AI is telling me to buy DWTI on or about November 1. Please stay in China as I may be joining you. The political system is so out rages here it may be better in China. Best to your family and all Walt.

Gary October 14, 2016

How 's gold going to rise with such a high dollar . If we are the swing producer,forget about precious metals.

Birdman October 17, 2016

Gary, if the euro falls 40% as the charts suggest then you better believe European demand for precious metals will go right through the roof and as a result of worldwide shortages generated by that event that gold and the US dollar will be rising together.

Scott Hartzler October 14, 2016

Your market models are spot on. But I am wondering if you still stand behind your AI models predicting Mr. Trump as our next president? Seems precarious. While the locker room talk is the final death knell, he has had less than a 5% chance of garnering 270 electoral votes from the getgo.

Steve Arnold October 14, 2016

The Saudis see the handwriting on the wall. That's why they are so intent on buying political influence here. What's worth more millions of acres of dirt and sand or the oil beneath? The way oil prices are going thanks to fracking in the US the only hope for the Saudis is to buy as much of America as they can or corner the the world glass market. Maybe they can talk Corning into investing in all that sand.

Carey October 14, 2016

I'm curious if US crude producers, now in reorganization under Chapter 11 bankruptcy, will recover and become competitive in light of the achieved and developing efficiencies (35%) and if so, to what extent their reappearance in the market may affect the price of crude.

David R Pacey October 14, 2016

""Two years after OPEC’s decision to capture market share, U.S. oil producers fought for survival and are now much leaner. During that time, U.S. shale oil producers lowered break even prices by around 35%."" This is your quote from the article. Costs lowered by 35%. So then, what are their average costs per barrel. That is the critical factor in this discussion which you have not addressed.

rudolph alvarado October 14, 2016

disagree with you many us and canadian E&Ps are not cashflow positive. still greatly in debt. while there will be rebound increased drilling to try to stay afloat and consequent pressure on ongoing oil price rises, capex will continue to be constrained

Ashu juneja October 14, 2016

U r amazing. I hope u r correct.

marie tasker October 14, 2016

MR LARRY Please be more clear on your prediction on the stock market are we going to have a big sell or it is going up from here . you see i have hard time to understand so you have to speak more clear and in a elementory way . thank you so much for your cooperation mrs tasker

marie tasker October 14, 2016

MR LARRY I AM VERY CONFUSE ON THE STOCK MARKET ARE WE GOING TO HAVE A BIG SELL OFF ORIS TIME TO LOAND ON THE STOCK THAT YOU HAVE RECOMMENDED TO BUY NOW OR WAIT FOR A SELL FIRST . THE STOCK THAT YOU HAVE RECOMMENDED ARE VERY EXPENSIVE LIKE=LNKD TSN =VMI =LMT =BA =GD =ETC.................... SO PLEASE NEED YOUR HELP NOW THANK YOU SO MUCH GOD BLESS MARIE T

Karl Kelly October 14, 2016

Great news to know America is now the world's new swing oil producer and not be controlled by OPEC

Birdman October 17, 2016

Karl, Saudi Arabia is a vasal state of America. They are doing as they are told and they are being told to overproduce. OPEC is not an adversary anymore. All major producers are working hand in glove for a higher purpose no matter how preposterous that sounds on the face of it. Don't you wonder why the majors are not being put out of business by the banks? It is because there is an agenda at play but it is actually in all our best interests so there is no push back from the boys in accounting.

James Blanton October 14, 2016

I am a very small Texas oil operator with a lease undergoing changes to stay marketable. My sales are going up this year due to my low cost of production. From the talk around the town coffee table, it seems we all produce to survive but there is a bottom dollar figure for which we will not sell. I can continue to produce oil and tank it until the price is right. Supply and Demand will have to adjust for all.

Kathy October 14, 2016

I suppose you mean the US motive for ramping up production is to take advantage of the higher prices at the moment but will ultimately drive them down, That will make my nephew who complains about how much gasoline he is having to buy since he moved back to this state happy. Actually, It seems like will ultimately make more people happy than unhappy in this country,

mikjall October 14, 2016

Larry, Thank you for "Why the OPEC Production Cut Is Doomed". Please keep us regularly up-dated about the situation in oil (and natural gas). All the best, M

Doug S. October 14, 2016

Awesome work, Larry! Please keep sharing your updated cycle charts on a weekly basis. They're a HUGE help to grasping direction /timing! Thank you!

Terry Cervantes October 14, 2016

Larry, thank you for your updates on oil and gold. I've been reading your articles for a few months now and it seems like your not like all the rest of the writers, you do know what your talking about. I'll know more as things materialize over the coming months. Again, thank you.

John N. October 14, 2016

Thank you very much for that forecast!!

jose October 15, 2016

The law of gravity says what goes up must come down. They abused the working class by raising oil to150 back then and they were laughing as they saw the world suffer emptying our wallets to them while they were building islands and gold towers now let them suffer and experience the pain of paying almost half of your salary just to buy their gas

gordon October 15, 2016

When are investors going to stop following all this quarterly baloney that companies keep feeding us? Take J.P. Morgan for instance. If you follow drill into their numbers everything was down. Then these dime a dozen "economists" come in with their "expectation" numbers. Read the following and notice how often the word "fell" appears. Profits FELL net income FELL on a per share basis earnings FELL Investors feed on this fell but not badly numbers and drive the stock up 2%. Its the old shell game underpromising and overdelivering. JPMorgan Chase on Wednesday reported earnings that easily beat expectations, but profit fell 6.7 percent drop as costs to cover possible sour loans to troubled shale oil companies rose and revenue from trading and investment banking declined. JPMorgan's shares were up 2 percent in premarket trading. (Get the latest quote here.) The bank's net income fell to $5.52 billion in the first quarter ended March 31, from $5.91 billion a year earlier. On a per-share basis, earnings fell to $1.35 from $1.45. Total revenue fell 3 percent to $24.08 billion, beating the average estimate of $23.40 billion, while revenue from fixed-income trading — often JPMorgan's most volatile business — fell 13.4 percent to $3.60 billion. Analysts had expected JPMorgan to report earnings of about $1.26 a share on $23.39 billion in revenue, according to a consensus estimate from Thomson Reuters. JPMorgan cuts 5% of Asia wealth management jobs Good ole Jamie Dimon the friend of the Fed makes the following statement and buys more shares "The consumer businesses continue to grow loans and deposits impressively, attracting deposits faster than the industry," JPM Chairman and CEO Jamie Dimon said in a statement. "The U.S. consumer remains healthy and consumer credit trends are favorable."

SAM October 15, 2016

THANKS, LARRY! I WAS HOLDING TONS OF STO TO GLEAN THAT 5+% INTEREST.

Bill Winder October 15, 2016

Hello, The chart above is interesting as it doesn't show oil prices on the left side at all,,, and further doesn't have a legend identifying what the green and black lines represent. Further, if oil is going to be going down, do you have any specific and actionable investment recommendations to profit from the move? Thanks, Bill Winder

Jon Russell October 15, 2016

What's the break even cost for fracking? I'm guessing the cost has come down to extract oil through improved fracking technique. So where are we because I thought the number was well north of $50 a barrel.

mohamed October 15, 2016

Hello.

Albert kapaya October 15, 2016

Am every great foul sir with what you are doing i need your sport in my business,thank you.

espy October 15, 2016

Iran should be pretty flush with cash after that ridiculous nuclear deal, including a huge "signing bonus". Perhaps they squandered it all already as the world's largest state sponsor of terrorism.

Eli October 15, 2016

Wow Larry! Takes guts for a call like that. Thanks for responding to my request for an analysis of oil prices.I assume you don't think it's even worth holding oil stocks with a medium-term view either.

Susan October 16, 2016

We have invested over 650K in Oppenheimer MLPDX fund. How would dropping oil price effect the fund ? Should we move the funds to somewhere else? If so, where? Thank you very much.

Michael Sherman October 16, 2016

Larry, When do you project would be the best time to get into Gold and silver? Should we sell oil now? thanks Michael

Andrew October 16, 2016

Larry, very logical and very convincing Thank you

marge October 17, 2016

Why are people so interested in oil? Obama captured the US energy market by exec order 2/15/09 and made his own personal depression with 94M workers out of work. 2-4 years and the saudies are leading we will have a new liquid fuel from vaporized sand using sun energy and then cooled back to a liquid like water to steam back to water. Sand is endless. No man made global warming just like Galileo told us 400 years ago in the earth rotation on the axis tilt to the left 1 O every 71.6 years. The artic will be at the equator in 7K more years. Even al gore cannot stop the spin- Spread the good word. forget green