Crude oil demand, supply, and prices
The world is currently awash with crude oil. As US output—driven by horizontal drilling and hydrofracking—has soared to levels unseen in roughly three decades, OPEC too finds itself pumping crude oil well in excess of the 30 million-barrel-per-day (or bpd) cumulative limit that members had set for themselves in 2011.
These trends hit a sort of tipping point in the middle of this year, just as supply outages in major OPEC member Libya started to resolve. Libya alone increased its production to ~1 million bpd recently from barely 200,000 bpd earlier this year.
June saw a peak in benchmark crude oil prices. The international benchmark, Brent, hit ~$115 per barrel, while American benchmark WTI crude hit ~$107 per barrel. Both benchmark crudes are currently about 30% off these levels.
Effect on energy companies
This bearish dive has taken its toll on energy companies and ETFs alike. Oil-tilted producers like Occidental Petroleum (OXY), Hess Corp. (HES), Murphy Oil (MUR), and Marathon Oil (MRO) are all down between 15% and 20% during this time. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is down ~30%. So, crude prices going forward will be crucial for companies and ETFs like these.
Why the OPEC meeting matters
Now, given the supply and demand situation, were OPEC to leave production levels unchanged, crude oil prices would fall further. This would be bearish for energy companies.
On the other hand, were OPEC members to reach some sort of consensus, even to adhere to their cumulative 30 million bpd limit, this could remove approximately 1 million barrels of crude oil supply from the world market. This would be very bullish for crude prices and energy companies.
Stock markets will be closed and crude oil exchanges will shut down in the afternoon on the day of the OPEC meeting for Thanksgiving. Plus, most crude oil traders will be on holiday.
This will make crude prices very volatile following the outcome of the meeting, and stock market investors won’t be able to do much either.
We’ll address this issue in the following parts of this series. But first, read on for an important analysis of natural gas prices as we work up to our strategy for this event.