Turner’s Take Weekly – OPEC

This is a sample entry from Craig Turner’s email newsletter, Turner’s Take Weekly, published on November 28, 2014.

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OPEC

The widely anticipated OPEC meeting was yesterday and the cartel opted to not cut production. Here is a story on the meeting from CNBC: http://www.cnbc.com/id/102222286. Crude Oil is down about $4.00 from Wednesday’s close and trading under $70. When was the last time you saw crude at $69?

January Crude Oil

This OPEC meeting was probably the most anticipated and watched in years. Bulls were arguing OPEC needs to cut production to send prices higher. The problem with that view is that if OPEC cuts, it is really Saudi Arabia that is cutting production, and the other OPEC nations still produce their quota. Saudi Arabia is the largest producer in OPEC and with crude down so much, they want everyone to cut, not just them. Another issue is non-OPEC nations like Russia can step in and fill the void OPEC leaves and gain market share.

There were a few reports last week about Saudi Arabia meeting with Russia ahead of the OPEC meeting. No one really knows what the agenda was and what they may or may not have come to terms on, but I have a few thoughts:

1. The fact that Saudi Arabia is having closed door negotiations with Russia just shows how badly US/Saudi Arabia relations have been damaged.
2. It only makes sense (in my opinion) if Russia and Saudi Arabia both cut production. They are both huge producers of crude oil and if they are not on the same page, supply cuts to support pricing does not make sense.
3. Even if you keep oil prices high, that just incentivizes private companies (like those in the US and other developed nations) to develop innovative ways to find more oil. We are seeing that now in the Shale Revolution.
4. If crude is at $60 the nations like Saudi Arabia and Russia have a competitive price advantage for crude due to their lower cost of production.
5. Lower Crude Oil prices slow the exploration and production of crude in the US, allowing nations with lower cost of production more market share.
6. Don’t forget the rising tensions between Saudi Arabia (Sunni) and Iran (Shia) is a major cause of the issues we see in the Middle East. A drop in prices (and therefor revenue) hurts Iran more than Saudi Arabia.

We are bear spread Jan vs April Crude Oil from $0.00 and I think this spread could trade to -$1.00 to -$2.00 depending on the trading environment. For now we hold. I think the market is just trying to sort out where the flat priced futures should trade. I think next week the market turns its attention to the market structure and sends this spread lower as the trade will expect the crude oil market to be adequately supplied.

Jan Vs April Crude

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