Investors watched with bated breath Thursday as oil tumbled -3% intraday to less than $49 per barrel. That took the 10-day fall in oil prices to almost -10%. Many on Wall Street felt the pain. As we’ve noted this week, one of the more crowded trades these days is long oil prices.
Recent price action has been nothing shy of startling.
OPEC’s oil production cut in November pushed prices up from $45 prior to the announcement to $55 per barrel earlier this year. The 13 OPEC member countries are a powerful cartel controlling 33% of world oil production. But the short-lived rally started to unravel this week as U.S. crude inventory data revealed rising prices helped stoke U.S. oil production.
Even with the OPEC oil cut agreement in place, we’ll be watching for cheating amongst member countries. History shows that prior OPEC oil production ceilings weren’t usually adhered to.
In fact, a study showed that member countries cheated about 96% of the time on similar agreements from 1982 to 2009. All “promises” should be viewed with a healthy dose of skepticism. Trust that most of these countries have their fingers crossed and mischievously hidden behind their backs.
Saudi Arabia is already bearing much of the burden says Hedgeye Commodity analyst Ben Ryan in the video above from The Macro Show. It pumped 10% of global oil production last year, but has already reduced production by -4.7% year-over-year in 2017.
Much of this is known already by the wider investment community. But what smart investors should be watching very closely, Ryan says, is the tally of OECD world crude oil and liquid fuels inventories. Right now, the world’s crude inventories are expected to peak in January 2017 at 3.1 billion barrels per day, a 19% build in inventories.
“This is something we’ll need to watch, the global supply to demand overhang,” he says. We’ll be monitoring this very closely in the coming months. Check back for updates.
