OPEC Mutiny

Brit Ryle

Posted December 1, 2023

I’m still a little stunned about the results of yesterday’s OPEC+ meeting. Because the big takeaway is that Saudi Arabia has lost control of OPEC. 

As a little background, oil prices have been falling ever since the brief spike after the Hamas attack on Israel. Now, the Saudis don’t like it when oil approaches $70 a barrel. And early last week, prices hit $73. Saudi Arabia would much prefer $83 a barrel (or higher), and that’s why they got together with Russia to announce a 2 million barrel a day cut to production back in the summer. 

That cut didn’t do much to get oil prices higher. And neither did the usually reliable catalyst “tensions in the middle east.” So when oil prices started dropping again in mid-October, pretty much every forecaster was saying that Saudi Arabia would push for more production cuts. And right on cue, oil started rallying when an OPEC+ meeting was announced for this past weekend. 

We probably should have had an idea that something amiss when the meeting was postponed to yesterday, apparently because Angola and Nigeria didn’t want to cut production…

And yesterday’s meeting didn’t change that.

Oh, OPEC+ did say they would cut by another million barrels. But no member country was tasked with any specific target. The cuts are, apparently, voluntary. Which is to say – Angola and Nigeria won’t be cutting their production.

Even better, OPEC+ announced that Brazil was going to join up. But Brazil has already said they won’t be enacting any production cuts. In fact, Brazil’s state run oil company Petrobras, has already laid out its CAPEX plans for 2024. Brazil will boost spending by 30% to $102 billion,  aiming to boost output by 400 million barrels a day or so. 

It’s like a full on OPEC mutiny!

Russia is Cheating

One of the big wildcards for global oil supply is Russia – I’d say it’s pretty clear that Putin has not actually cut Russian oil output like he said he would. That’s a big reason why China has an oil surplus right now – back in October, it was reported that China was putting 500 million barrels a day into storage. It seems China has no problem buying Russian oil at a discount to help fund Putin’s war machine. 

The other wild card is U.S. production. U.S. output is hitting all time highs at 13.5 million barrels a day right now. 

But like I’ve said before, U.S. oil companies have abandoned the “drill, baby, drill” strategy. Even now, rigs drilling new wells in the Permian Basin, for instance, are lower than they were at recent peaks: 

This is because there are fewer small producers and mid-majors working U.S. oil fields. A wave of consolidation over the last few years has seen Anadarko get acquired by Occidental (NYSE: OXY) and more recently, Exxon (NYSE: XOM) bought Pioneer and Chevron (NYSE: CVX) bought Hess. Rumor has it that Occidental is about to take out the biggest private company working the Permian, CrownRock.

We can expect that Big Oil will focus more on managing cash flow than significantly increasing production. Especially in a global environment where supply and demand seem to be in pretty good balance. 

BRICS: The League of Anti-Dollar Nations

So, the major countries of OPEC – Saudi Arabia, Russia, and now Brazil – and non-OPEC countries like India and China, which up the BRICs – have been very vocal about wanting to end the US dollar dominance on the global stage. And that’s especially true when it comes to settling oil trades…

Russia’s tried to settle its oil sales with rubles. But nobody really wants to own rubles, at least not longer than they have to. China’s yuan seems to be the de-facto choice among the “de-dollarization” crowd. Brazil and India have used yuan for oil purchases. Russia has even sold yuan-denominated bonds. 

But to get beyond simply dabbling in using currencies other than the U.S. dollar will require some cooperation among the BRICS. They’d need to agree on some rules for a fiscal union, probably some version of a central bank…

Seems to me that if these countries can’t even agree on and adhere to oil production targets, agreeing on a common currency for trading purposes is a bit of a stretch. And I seriously doubt Russia or China will make any partnerships that involve ceding some control to any other country…

So the next time you see the financial media get worked about de-dollarization or OPEC+, just remember that these organizations are pretty dysfunctional. Ultimately, they should serve as yet another reminder that the best place to invest is U.S. stocks that trade on U.S. exchanges.

That’s it for me this week, have a great weekend and I’ll talk to you Monday…

Briton Ryle
Chief Investment Strategist
Pro Trader Today
brit.ryle@protradertoday.com
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