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OPEC's Dog & Pony Show

Is crude oil a good investment?

The Organization of the Petroleum Exporting Countries (OPEC) would certainly like you to think so. Yet OPEC is producing more crude than it did in 2015 — a time when crude prices were in freefall. It’s freezing production during seasonally-weak-demand months, when it would normally cut anyway.

It gets worse for oil investors…

OPEC, not surprisingly, hasn’t met its production cut targets. (Does it ever?) Bloomberg data shows that official estimates have been falsified.

The US shale oil game is a far more serious situation than some production-cheating by OPEC members, though.

US Energy and Information Administration statistics released on Monday showed 5,512 wells drilled and left uncompleted — a 111-well jump from February to March. These are wells drilled but not yet produced, which could flood the market with crude at any moment. The US oil rig count jumped by 11 for a 13th week in a row last week — a two-year high.

An enormous amount of crude is about to hit the markets…

Flooding the world with crude

gCaptain reported on 13 April (my emphasis added):

Crude oil production in U.S. federal waters in the Gulf of Mexico (GOM) set an annual high of 1.6 million barrels per day (b/d) in 2016, surpassing the previous high set in 2009 by 44,000 b/d, the U.S. Energy Information Administration said Wednesday. 

In January 2017, GOM crude oil production increased for the fourth consecutive month, reaching 1.7 million b/d. On an annual basis, oil production in the GOM is expected to continue increasing through 2018, based on forecasts in EIA’s latest Short-Term Energy Outlook (STEO).

Contributing to 2016’s high production levels, a total of eight projects came online in the GOM last year, with another seven projects anticipated by the end of 2018. With the addition of these new and existing fields, the EIA estimates that annual crude oil production in the GOM is expected to increase to an average of 1.7 million b/d in 2017 and 1.9 million b/d in 2018.

Indeed, as if the crude supply situation couldn’t get worse for oil investors, Gulf of Mexico oil production hit a new record high last week.

The oil experts — perhaps heavily invested in black gold themselves — appear to ignore that fact.

International Energy Agency (IEA) data shows global crude inventories fell by roughly 200,000 barrels per day during the first quarter of this year. Its production drawdown forecasts are shown in light blue (OPEC in dark blue):

Source: Bloomberg
[Click to enlarge]

The IEA believes there are no issues with crude demand. That’s because they assume OPEC will meet, and continue, with its production cuts.

That’s a mighty big assumption.

The cuts haven’t even been made in full yet. In other words, I’m convinced the Agency’s assumption that crude stocks fell last quarter is already wrong. No doubt that analysis will be retracted soon. And when it is, you can expect a crude oil crash to follow.

Below you can see OPEC’s production cuts, courtesy of Bloomberg:

Source: Bloomberg
[Click to enlarge]

The cuts ‘not made’ are shown by the yellow bar on the chart. The light blue bar shows rising US shale production. The light and dark red bars show Nigeria and Libya’s crude increases. The dark blue bar shows what OPEC is cutting. As you can see, they’re fighting a losing battle.

There’s almost no chance that OPEC will meet its production cut targets. It’s a dog and pony show — a pipe dream — to artificially keep crude prices higher.

The longer the mainstream buys into these supply cut forecasts, the worse it becomes for crude oil investors. More crude should hit the market from the Gulf of Mexico in the months ahead. The US shale comeback won’t slow down either. OPEC’s member states fudging their own production-cut numbers will only rub salt in the wounds.

The world remains extremely well-supplied with oil. There’s almost no chance demand will outweigh supply this year. Though it may bounce around and head a bit higher in the short term, the longer-term trend for the oil price is only heading one way — down.

This is a repeat set-up of 2014–15. Everyone became bullish on crude, with overly-optimistic forecasts trotted out by industry insiders. The reality was quite different, which I’m sure you’ll recall. Eventually, when the mainstream finally caught on that oil stocks were being manipulated, the crude oil price nosedived.

Unless we see a shooting war break out in Korea, or one of the world’s other hotspots truly ignite (god forbid), look out for an encore performance.

As New York Yankees Hall of Famer Yogi Berra famously said, ‘It’s deja vu all over again.

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