Is Price of Oil in Trouble This Winter?

I know, who am I to tweak Shakespeare, but this is important! Frankly, I have a much better understanding on the subject matter than ole' Bill does. Keep reading and decide for yourself.

Many Wall Street analysts say the most difficult market to predict is the oil market. It can drastically spike and then crater all before lunchtime on any given day. “Why?” You may ask.

Glad you did.

There are an unlimited amount of variables that directly impact the easily manipulated oil market. According to the 2017 OPEC Annual Statistical Bulletin, the 14 countries that make up OPEC (Organization of the Petroleum Exporting Countries) control 81.5 percent of the oil reserves, having approximately 1,216 billion barrels combined.

So, what does that mean to the oil market and its prices?

It is very simple. OPEC can release as much or as little oil into the market as it desires.

This year has been full of events that have allowed OPEC to play with the oil reserves. Hurricanes, geopolitical events, strength of the U.S. dollar, U.S. interest rates, and the OPEC agreement itself have all played a major role and there is still a quarter left to go.

Don't forget this fact as well: the price of oil dropped to $40 per barrel in 2014 after halted consumption in countries like China, Russia, India, and Brazil. OPEC had a visible supply on the open market, but few buyers. Think back to Intro to Economics during your freshman year of college. What did you learn? The famous Supply and Demand Curve, of course. (Imagine, something we learned as freshman actually being useful – Shakespeare not withstanding!)

Now, quick, what happens to the supply and demand curve after a rapid growth followed by a tremendous slowdown? (And don't look at Shakespeare's paper).

The price drops! And it can drop quickly and deeply.

OPEC does not want that to happen again, so they have implemented a tighter control on the oil valve. OPEC agreed to slash production to 1.8 million barrels per day in November of 2016 and to keep that level consistent until the agreement expires in March 2018. However, there have been reports

that the 1.8-million-barrel limit may be extended. It isn’t clear how long, but be certain — the events of the world will have a massive impact on the stability of that number.

There is also the matter of the United States increasing their production of Shale Oil. This is of special interest in Iraq because of their long-standing battle with the independence-seeking Kurdish faction. Any resistance to this vote (last week the Kurds voted overwhelmingly in favor of their independence) could disrupt oil production in the region by 500,000 barrels per day.

This could cause tension within OPEC and further affect oil production, thus causing prices to spike again.

Currently, the United States is producing 9.55 million barrels of crude oil per day. Baker Hughes (the largest oil producer in the U.S.) stated it has seen significant growth and expects the trend to continue. This is yet another reason for OPEC to massage oil production, or the release of oil into the market.

One subtler factor in the oil dilemma is the three different grades of crude oil: Heavy, Medium and Light. Heavy crude oil is produced mostly in Venezuela. Clearly, there is not much stability in the country, as they seem to play the wild card role and relish doing it. We see medium crude oil produced in the OPEC nations Saudi Arabia and Iraq, as well as Canada and Mexico. The Fort McHenry fires that shut down production in 2016 were just fully extinguished in 2017. The earthquakes in Mexico shut down the production there, as well.

Advantage: OPEC!

The United States produces light crude oil along with Libya and Nigeria. It is worth noting that Libya and Nigeria — both members of OPEC — are excluded from the current agreement of 1.8 million barrels per day. This is helpful, as they will look to maximize production to stimulate their economies.

Advantage: United States!

And remember, light crude is the least expensive to process. Shakespeare won't tell you that!

All in all, prepare for a long and bumpy road on the way to fill up your automobile and your home heating oil tank this winter.

As unpredictable as the oil market can be, this fact looks to be consistent. Shakespeare and I can even agree on that one!

Dante Vitoria is Founder and CEO of The Vitoria Group. For over 30 years, Dante Vitoria has been running his own firm, The Vitoria Group, which has broad experience in working with companies of various sizes to fulfill its clients' financial needs. The client base is extremely diverse, ranging from international money centers, domestic banks, insurance companies, and financial firms. The Vitoria Group provides a vast array of financial services specifically tailored to enable clients to meet their goals — the assistance, direction, and access to professional banking and other facilities. Dante's 30+ years experience as an investment banker on Wall Street, provides insight, expertise and comprehensive advice with a down-to-earth-approach on key aspects of local and international economics, personal finances, and financial planning. To read more of his reports — Click Here Now.