Energy Markets: Russia’s Crude Game of Semantics with OPEC

Have you seen what’s happening in the energy markets?

Only last Tuesday West Texas Intermediate crude oil (WTI) was still trading for US$58.71 per barrel. Though that was already down 6.7% from its 6 January peak.

At the current price (US$52.95 per barrel) WTI has now fallen 9.8% since Tuesday, 21 January. As you can see on the chart below, that puts WTI down 16.4% since 6 January.

WTI Price - West Texas Intermediate crude oil

Source: Bloomberg

But even after that big pullback, the crude oil price could easily slip another 10% from here.

That has very little to do with demand and very much to do with supply. Lots and lots of ready supply.

The shale revolution still underway in the US is one of the primary drivers of that abundance. A revolution that’s already seen the US pump record amounts of crude to become an oil exporter.

But it’s not just the US. Russia comes in a close third (after the US and Saudi Arabia) in its oil output.

Now as you may know, Russia is the plus part of OPEC+. And the cartel recently agreed to extend its output cuts through the end of March. You may also know that agreeing to output cuts and actually abiding by them are two very different things.

The incentive to cheat amongst the cartel members is big — millions of dollars per day big. And the Russians appear to be engaged in a high stakes game of semantics with their OPEC partners.

As Bloomberg reports:

Russia’s oil production surged to a five-month high in January following a new agreement to apply OPEC+ output cuts only to the country’s crude, not its condensate.’

In case you’re not aware, ‘condensate’ refers to oil that condenses into liquid form from gas. Something you’ll see with fracking high pressure wells. However — and here’s the catch for OPEC — once the gas condenses into liquid it’s hard to distinguish condensate from regular liquid crude.

Whether the Russians are technically cheating or not is debatable. What’s not is the surge in their overall oil production.

Even if OPEC+ agrees to extend the current cuts throughout 2020, the global supply glut isn’t going away. Meaning prices could fall another 10% from here. If the cartel’s agreement lapses at the end of May, crude could fall much further.

Something to keep in mind if you hold any major oil producers in your portfolio.

And it’s not just oil taking a beating from fears of the coronavirus leaking out of China. Stock markets across the globe are selling off. In intraday trading, the ASX 200 is down 1.4%.

Despite the sell-off we’ve seen in the last few days, Rum Rebellion editor Vern Gowdie believes most stocks remain highly overpriced. Vern broadly advises steering clear of all stocks until prices correct. But he sees some stocks as more toxic than others.

In this free special report, Vern outlines five stocks he suggests you consider selling immediately.

You can click here to get your free report with all the details now.

Bernd Struben is an Editor of The Rum Rebellion. In this capacity, he has access to one of the most intriguing and powerful networks of practical investment insight anywhere in the world.

Bernd has worked on four different continents, and has more than 20 years of professional finance, editorial, and management experience. He holds a degree in economics.

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