Wednesday, November 30, 2016

OPEC agrees to cut production -- Futures go wild!

Three pieces of news this morning:

1) The US dollar keeps on rising
2) OPEC agreed to cut 1.2 MM/BBL per day
3) Cushing inventory at an all time high


All three of these news are about the same thing; first the agreement to cut oil production (yeah sure) by 1.2mm/bbl day should improve the over capacity issue that is in the market today.  Of course with higher prices there will be a HUGE incentive to cheat (that's always been OPECs problem -- and non-OPEC players can do what they want).  The rise in the US dollar follows from a sense that the problem of OPEC (and of most countries in the middle east) are solving themselves and we can get back to making money...not.

The rise of the US dollar is driven by a fear of world event; the world is very worried about Europe and its banking system -- hence its currency.  In reality, with inventories at all time high (in the US and in Europe) there cut of 1.2mm/bbl per day is probably not enough to change the situation.

The rise of the dollar is a "fear indicator" and not a positive development; the same way that a drop in the Mexican Peso is an indication that things in LatAm are in poor shape -- the MXN is the only readily traded currency in LatAm; it acts as a fear proxy for the region.

Demand for crude is simply not large enough to meet the producer's production requirements; since storing oil is expensive -- worldwide oil reserves is counted in weeks (not in years), this lack of demand is a function of a slowing global economy (or in the case of most of Europe a growth less environment).  China is slowing down, rumors of slowdown in the US abound (demand for cars seems to be off), and recent rise in interest rates is certain to dampen demand for new cars and houses (Consumption drives the US economy).  The world is simply not turning fast enough for oil producers, the market knowns that this latest agreement will last a few weeks/months until the cheats (by all the players) push back excess supply to depressed prices.

The sure thing of oil at $90 is some ways off, especially since both the US and Mexico have just found mega sources of light sweet crude.  it seems the dinosaurs are not done with providing us with cheap oil...

NOTE:  I don't know why that is but each time I write about the airline industry the numbers of reader multiplies by a factor of two...

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