It is no secret that the nation of Greece has suffered greatly from economic woes in recent years. Greece has struggled with high unemployment and severe economic depression for years with some parties saying the country is worse off than the United States was during the great depression in the 1930s. Yet into this bleak situation hope has emerged, in the form of the energy markets.
For months, OPEC has been attempting to put a floor under the price of oil, with little success. Last week the countries of OPEC renewed their commitment to this goal by extending production cuts an additional 9 months. Recognizing their inability to do this alone, OPEC brought in Russia and a host of smaller players in the oil production market. The main player’s motivation for this effort is obvious, next year the Russian elections take place and the Saudi Arabian oil IPO, Armco comes out. What is less obvious to some people, is that all of this could be an exercise in futility.
The production cuts deal lead by OPEC and Russia have received a great deal of publicity lately, but in reality it is the Chinese economy that could make or break the oil markets this year. While these supply side players have promised to do “whatever it takes” to support the price of oil, in large part the rise or fall of the world’s most traded commodity lies with their largest customer.
Riyadh and the house of Saud have stated their intentions to reduce oil to the United States. This action is being taken in order to reduce oil inventories in the US. According to Saudi Oil Minister Khalid Al-Falih, the near record stockpiles of oil which have accumulated in the United States are preventing a rise in global oil prices.
Iran has signed an agreement with Russia to trade crude oil for products with US dollars entirely absent from the transaction. The deal, which has been confirmed by the Russian media and Iran governmental authorities, needs to bypass the world’s reserve currency entirely due to the restrictions on trade in US dollars in Iranian banks. The deal has been under discussion since 2014 when Iran was still facing Western sanctions stemming from its nuclear program.
The oil industry differs from many others in that it seems to thrive on speculation and disorganization. The industry has very little desire to collect and utilize data in order to become more efficient. Data collection is instead being left to third parties who are attempting to collect and organize data in a way that it becomes useful to oil traders.
Oil prices fell during Thursday’s market session. The drop coincided with OPEC’s meeting in Vienna, where the announcement was made that production cuts would be extended at current levels for an additional nine months. Market analysts speculate this drop was caused by the market opinion the extension of the cuts at their current level might not have the desired effect of sufficiently reducing global oil stocks.
In a meeting at the OPEC headquarters in Vienna Austria on Thursday, OPEC decided to extend production at their current rate of 1.2 million bpd for an additional 9 months. OPEC will almost certainly be joined in these production cuts by a dozen other non-OPEC oil producing nations. The group of non-OPEC reducing nations is led by Russia, which will continue its production cut that began in December when the previous round of OPEC cuts which began. The non-OPEC share of the production cuts is expected to be around 600,000 bpd.
Much has been made in the energy markets lately of the intentions of OPEC, whether the extension of the production cuts will have the desired effect upon oil stocks, and the markets reaction. What hasn’t been discussed however, is that if the production cuts were effective one man could decide to restore oil stock to record highs almost instantaneously. That man is of course, the most powerful man in the world.
With the latest extension of OPEC’s production cut set to continue for an additional nine months President Trump believes it is a good time to reopen the discussion on Alaskan drilling. It has long been suspect that the vast 19-million-acre Arctic National Wildlife Refuge (ANWR) contains large untapped reserves of oil. By opening this area for commercial development President Trump proposes attempting to help alleviate two problems simultaneously.
