Post by jeffolie on Jun 4, 2015 7:06:50 GMT -6
Friday Is Judgment Day In Crude Oil's Financial Cold War
Jun. 4, 2015
Summary
•On Friday, June 5th, OPEC will meet in Vienna, Austria for the first of two annual meetings to debate increasing, decreasing, or maintaining its current production target of 30 mbpd.
•To date, OPEC has pursued a policy of promoting short-term weakness in oil by standing firm in its outputs to pressure US producers and regain market share when prices rebound.
•This article highlights the current state of the US vs. OPEC financial Cold War and projects the outcome of Friday's meeting in this context and its impact on oil prices.
•My investment strategy going forwards with both entry and exit targets is discussed in detail.
On Friday, June 5, the Organization for Petroleum Exporting Nations (OPEC) will meet in Vienna, Austria for the first of two yearly meetings to debate the state of the global oil market and decide whether to raise, lower, or keep production targets for member countries unchanged at 30 million barrels per day. For the past year, OPEC has been playing a dangerous game of chicken with the West - a financial Cold War of sorts - by eschewing its traditional practice of reducing output to bolster prices and instead has stayed firm at its 30 million barrel per day production quota. Many believe that the organization is instead looking beyond short-term weakness in global prices and is interested in supporting long-term strength and a return to relevance for the cartel by allowing low prices and ample supply to drive shale producers out of business. This article discusses the effectiveness of this strategy to date, the current state of OPEC versus the global and domestic markets, and the implications of OPEC's Friday decision.
Some will argue that Friday's meeting is a non-event as several OPEC representatives have already seemingly divulged the probable outcome of the meeting. Even if this is true and is not part of some stratagem, the wording of the meeting minutes and any apparent dissent will provide significant clues to an assessment of OPEC's strategy to-date and its longer-term goals. And despite the fact that OPEC has not changed production quotas for several years, that hasn't stopped crude oil volatility from surging immediately following meetings
.....
I believe that crude oil is now being attacked on 3 fronts. First the US dollar appears to have bottomed following its May decline, which should act to place a price ceiling on the commodity, supply/demand notwithstanding. Second, suspect data or not, domestic production continues to set weekly records, despite a 60% reduction in the rig count. Finally, for all the reasons discussed in this article, I expect OPEC will continue a policy of encouraging a global oil glut with increased imports, further exacerbating the current domestic oversupply.
As a result, I remain bearish short and medium term on oil with a price target under $55/barrel. I currently have a short United States Oil Fund (USO) position from $20.40 worth 20% of my portfolio along with a small short Market Vectors Russia ETF Trust (NYSEARCA:RSX) worth about 5% of my portfolio with a cost basis of $19.30 in order to gain short oil and global equity exposure. And while I do not expect OPEC to give the bulls any ammunition to make a run, it is my policy not to gamble by trading event stories given how unpredictably investors respond to them, even if one has a good idea of the news itself. As a result, I will plan to hold both of my current positions through the announcement. Should OPEC flame the bearish sentiment, I may consider getting more aggressive and adding a small short position in the 2x leveraged ProShares Ultra Bloomberg Crude Oil ETF (NYSEARCA:UCO) or the VelocityShares 3x Long Crude Oil ETF (NYSEARCA:UWTI). My medium-term price target is $50-$55, at which point I will unwind my RSX position first, followed by any leveraged positions that I may open, and USO last as oil approaches $50. My criteria to throw in the towel and close my short positions at a loss include a sustained (>3 week) drop in production of >250,000 barrels per day, a decline in the US rig count under 600 rigs, or a shift in the international supply/demand surplus.
In conclusion, the OPEC policy of maintaining a global supply glut has been effective in re-establishing its market share in terms of rig count, but not production. If it wishes to achieve the latter, a prolonged period of depressed prices is necessary to reduce US oil production. As a result, I expect the cartel to announce on Friday that it will be maintaining its current output at 30 million barrels per day - although observed production has been 0.5-1.0 million barrels higher - to maintain a global supply surplus of nearly 2 million barrels per day. Because its production does not count towards the output target, OPEC member Iraq could increase production even further - barring interference from geopolitical issues - to put further pressure on supply. As a result, I maintain a short-medium term bearishness and will continue to hold my short USO and RSX positions going forward.
This article is not intended to argue either for or against the strategies of US shale producers or OPEC. OPEC naturally wants higher prices but is willing to bide its time to ensure that when these higher prices arrive, its fading influence is re-established. It is only good business sense - and probably much appreciated by worldwide oil consumers benefiting from cheaper prices. US producers, on the other hand, have developed increasingly efficient drilling practices and are hoping to wait out OPEC, whose members are rapidly burning through their own cash reserves. There is something to be said about pushing for US independence from foreign oil, but, if the cost of such freedom is an increase in the price of oil, I wonder whether it is worth it. I am not here to debate the ethics of either policy and only intend to highlight both in order for you, the reader, to make the best-informed investment decision that you can.
seekingalpha.com/article/3235276-friday-is-judgment-day-in-crude-oils-financial-cold-war?ifp=0
Jun. 4, 2015
Summary
•On Friday, June 5th, OPEC will meet in Vienna, Austria for the first of two annual meetings to debate increasing, decreasing, or maintaining its current production target of 30 mbpd.
•To date, OPEC has pursued a policy of promoting short-term weakness in oil by standing firm in its outputs to pressure US producers and regain market share when prices rebound.
•This article highlights the current state of the US vs. OPEC financial Cold War and projects the outcome of Friday's meeting in this context and its impact on oil prices.
•My investment strategy going forwards with both entry and exit targets is discussed in detail.
On Friday, June 5, the Organization for Petroleum Exporting Nations (OPEC) will meet in Vienna, Austria for the first of two yearly meetings to debate the state of the global oil market and decide whether to raise, lower, or keep production targets for member countries unchanged at 30 million barrels per day. For the past year, OPEC has been playing a dangerous game of chicken with the West - a financial Cold War of sorts - by eschewing its traditional practice of reducing output to bolster prices and instead has stayed firm at its 30 million barrel per day production quota. Many believe that the organization is instead looking beyond short-term weakness in global prices and is interested in supporting long-term strength and a return to relevance for the cartel by allowing low prices and ample supply to drive shale producers out of business. This article discusses the effectiveness of this strategy to date, the current state of OPEC versus the global and domestic markets, and the implications of OPEC's Friday decision.
Some will argue that Friday's meeting is a non-event as several OPEC representatives have already seemingly divulged the probable outcome of the meeting. Even if this is true and is not part of some stratagem, the wording of the meeting minutes and any apparent dissent will provide significant clues to an assessment of OPEC's strategy to-date and its longer-term goals. And despite the fact that OPEC has not changed production quotas for several years, that hasn't stopped crude oil volatility from surging immediately following meetings
.....
I believe that crude oil is now being attacked on 3 fronts. First the US dollar appears to have bottomed following its May decline, which should act to place a price ceiling on the commodity, supply/demand notwithstanding. Second, suspect data or not, domestic production continues to set weekly records, despite a 60% reduction in the rig count. Finally, for all the reasons discussed in this article, I expect OPEC will continue a policy of encouraging a global oil glut with increased imports, further exacerbating the current domestic oversupply.
As a result, I remain bearish short and medium term on oil with a price target under $55/barrel. I currently have a short United States Oil Fund (USO) position from $20.40 worth 20% of my portfolio along with a small short Market Vectors Russia ETF Trust (NYSEARCA:RSX) worth about 5% of my portfolio with a cost basis of $19.30 in order to gain short oil and global equity exposure. And while I do not expect OPEC to give the bulls any ammunition to make a run, it is my policy not to gamble by trading event stories given how unpredictably investors respond to them, even if one has a good idea of the news itself. As a result, I will plan to hold both of my current positions through the announcement. Should OPEC flame the bearish sentiment, I may consider getting more aggressive and adding a small short position in the 2x leveraged ProShares Ultra Bloomberg Crude Oil ETF (NYSEARCA:UCO) or the VelocityShares 3x Long Crude Oil ETF (NYSEARCA:UWTI). My medium-term price target is $50-$55, at which point I will unwind my RSX position first, followed by any leveraged positions that I may open, and USO last as oil approaches $50. My criteria to throw in the towel and close my short positions at a loss include a sustained (>3 week) drop in production of >250,000 barrels per day, a decline in the US rig count under 600 rigs, or a shift in the international supply/demand surplus.
In conclusion, the OPEC policy of maintaining a global supply glut has been effective in re-establishing its market share in terms of rig count, but not production. If it wishes to achieve the latter, a prolonged period of depressed prices is necessary to reduce US oil production. As a result, I expect the cartel to announce on Friday that it will be maintaining its current output at 30 million barrels per day - although observed production has been 0.5-1.0 million barrels higher - to maintain a global supply surplus of nearly 2 million barrels per day. Because its production does not count towards the output target, OPEC member Iraq could increase production even further - barring interference from geopolitical issues - to put further pressure on supply. As a result, I maintain a short-medium term bearishness and will continue to hold my short USO and RSX positions going forward.
This article is not intended to argue either for or against the strategies of US shale producers or OPEC. OPEC naturally wants higher prices but is willing to bide its time to ensure that when these higher prices arrive, its fading influence is re-established. It is only good business sense - and probably much appreciated by worldwide oil consumers benefiting from cheaper prices. US producers, on the other hand, have developed increasingly efficient drilling practices and are hoping to wait out OPEC, whose members are rapidly burning through their own cash reserves. There is something to be said about pushing for US independence from foreign oil, but, if the cost of such freedom is an increase in the price of oil, I wonder whether it is worth it. I am not here to debate the ethics of either policy and only intend to highlight both in order for you, the reader, to make the best-informed investment decision that you can.
seekingalpha.com/article/3235276-friday-is-judgment-day-in-crude-oils-financial-cold-war?ifp=0