We don’t have to worry about oil

President Donald Trump is giving OPEC stick because he wants oil prices to go down. He’ll have his way soon enough.

Even if you’re the President of the United States, you can’t have everything.

Donald Trump has been adamant the sanctions against Iran over its nuclear programme should be reinstated.

But Iran happens to be one of the biggest oil producing countries in the world. And Trump doesn’t like to pay top dollar for oil either.

Of course, the sanctions against Iran and the higher oil price have nothing to do with each other, according to the White House.

Trump blames the oil cartel OPEC that prices for a barrel of crude oil have gone to $80 again.

At least in the short run oil prices look more likely to go up than down. There’s even talk the oil price will soon hit $100 a barrel.

So Trump took to Twitter again:

“The OPEC monopoly must get prices down now!”

Problem is, the OPEC monopoly isn’t really a monopoly. Its share of global oil production is actually at a 27-year low.

It’s the US that’s to blame for the higher oil price. And it’s the US that’ll be driving the oil price down again.

Marriage of convenience

The Organisation of the Petroleum Exporting Countries (OPEC) has never been a happy marriage.

In 1960 Iran and Venezuela took the initiative to form a group with Iraq, Kuwait, and Saudi Arabia to talk about the one thing they had in common: oil.

It’s always been a fragile alliance.

The members never seemed to like each other very much. Iraq, under the dictatorship of Saddam Hussein, even invaded fellow members Iran and Kuwait.

Still, the importance of oil to their economies compelled members to put their differences aside most of the time.

OPEC became so powerful that it was referred to as an oil cartel.

But its best days may be behind it.

OPEC now counts 15 members, which is the most it’s ever had. Even so, its combined market share is a long way off its 1973 peak when it accounted for half of global oil production.

It’s currently good for about a third of the world’s oil supply. The US and Russia in particular have been eating away at OPEC’s market power.

What’s making matters worse is that two founding members are in crisis.

In Venezuela, President Nicolás Maduro has thrown his country into political turmoil which has led to economic sanctions.

In Iran, US sanctions are the cause rather than the consequence of unrest on the Iranian streets.

And everything is not well among the OPEC members either.

Iran doesn’t want other countries to compensate for the fall in production stemming from US sanctions, while Saudi Arabia is keen to increase its output.

More bad news is that Saudi Arabia has found a new partner in non-OPEC member Russia.

The Saudis seem more willing to agree on oil production quotas with the Russians than the Iranians, which looks set to undermine OPEC decision-making.

OPEC could soon be hitting an existential crisis because of domestic issues and disharmony in the group itself.

That doesn’t automatically mean the end is nigh, however.

“People have been calling the death of OPEC for years. But it’s still there,” David Stevenson, investment director of Strategic Intelligence, rightly points out.

OPEC may be a marriage of convenience but there’s no reason to belief that marriage will come to an end anytime soon.

With US shale producers taking more market share, the cartel will have plenty of motivation to work together again to fight this common threat.

Where’s the oil price headed?

Venezuela has 99 problems but expensive petrol isn’t one of them.

A litre of petrol costs $0.01 over there, which is of little help to us in the UK where we pay the equivalent of $1.71 per litre at the pump.

Today’s headlines don’t give us a lot of hope that the price of petrol will drop later this year.

Major oil trading houses are saying the price of oil will reach $100 per barrel before long. If not in the fourth quarter of 2018, then surely in the first quarter of 2019.

JP Morgan says a spike to $90 a barrel is likely and predicts output to fall by 1.5 million barrels per day.

That’s because the fall in Iranian and Venezuelan output isn’t easily compensated by other oil producing countries.

Even if they ramped up production now, it would take a while before the price would be pushed down again.

President Trump is giving OPEC a lot of stick about oil prices going up, which is ironic given both Iran and Venezuela are impeded by US sanctions.

Anyway, David Stevenson doesn’t think he has much to worry about:

“If it’s now consensus that oil is going to $100/barrel, in my book that’s a good enough reason why it won’t!”

David points to the fact that US drilling activity has risen by some 50% over the last year and US shale output could ramp up even further.

“As new pipelines are completed, that suggests even more American oil will be pumped in 2019 by a country that’s just become the world’s largest crude producer.”

Besides, supply is only half the equation.

Demand is the other half that helps determine the price of oil and that is something oil producers can’t control.

“If the global economic growth slowdown develops as I expect at the same time as extra US oil appears, crude values will be curbed and could well fall from current levels.

“In other words, I wouldn’t worry too much about an oil price surge over the next few years.”

Maybe Trump, if he is a little patient, can have everything he wants after all.

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