OPEC’s last year deal was its most ambitious economic move thus far. The oil-producers’ cartel – an industrialized power that mobilized over the last century, has harnessed Russia to help restore and multiply the organization’s pressure on the energy markets.

One month on, the move seems a success, as crude climbed from $46 to $54 per barrel, underscoring a year in which oil’s 60% plunge since 2014 finally bottomed out at $35.

I wouldn’t hold my breath.

Yes, the decline of recent years has bottomed out. But prices aren’t about to soar because the economic conditions aren’t there. On the contrary, 2017 will expose new and improved producers’ cartel as the same failed idea it has been even in its best times.

This decade’s oil glut has been fed by two trends, on the supply side, fracking has multiplied U.S. production. On the demand side, the great Recession that followed the 2008 financial crisis slowed industrial activity in the developed world and shrank the middle classes available income, all of which cut energy consumption.

The common denominator between these two developments is that they represent organic economic realities. That cannot be said of what OPEC and Russia, which is bureaucratic plot to disrupt market dynamics.

The OPEC-Russia deal’s vulnerabilities were evident before it was signed. A simple roll call of its parties showed that the agreement lacked four of the world’s 10 leading oil producers: China, Canada, Brazil and the U.S.

Between them, these four produce one third of the 10 leading producers’ output. That is besides the deal failing to recruit smaller, but still size-able, oil producers Norway and Britain. Even more tellingly, when the deal was done, it turned out that OPEC member Indonesia had opted out.

Added up, the deal’s non-signatories represent a critical mass whose increased production as prices rise will compensate for a good portion of the quantities that OPEC and its partners have promised to remove from the markets. That is besides that experience shows the deal signatories are likely to cheat each other for the same reason they arrived at the deal in the first place, which is that most of their economies are falling apart.

OPEC members have historically violated their own production caps steadily and systematically. Such a scenario is even more realistic now, because there are 11 non-opec parties besides Russia, from Bolivia to Brunei.

Oil plunged from $35 per barrel in 1980 to $10 in 1986. This year’s move will unravel much faster than in the last century, because China, OPEC’s biggest client has the world’s largest shale deposits. China has only begun to frack, but it plans to multiply production more than twenty-fold by the end of 2020, making shale 15% of its gas production.

In 2017, while their mutual cheating begins to show, OPEC and its fellow riders will learn that China is intensifying its fracking. This is besides Donald Trump likely expanding drilling and fracking across the U.S.

Oil supply, it follows, will be ample, its prices will return to decline sooner rather than later, and those who own it will have little choice but to peddle it back to the marketplace, where it belongs.


Technical Analysis Summary:

If you missed my oil sell setup last thursday(, here’s a second chance to jump in if you’re a bear.

Brent 1hr

Price is slowly creeping down from 61.8% Fib level like an old man easing into hot bath. I'd look to sell of the role reversal area or the 38.2% Fib Level with target of WM1

WTi 1Hr

WTi has similar price action where it broke the immediate bullish trenline on the hourly chart. I'd wait for price to retrace back to role reversal area to go short with target of WM1

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