The market is so oversupplied and worried about this condition persisting that it is ignoring, almost completely, the red hot geopolitical situation in the Middle East, which devolves from the top line rancor between Saudi Arabia and Iran.
Normally, these factors would create a large "risk premium" of a multiple of today's prices. And make no mistake, these tensions in the region represent a type of potential energy for a formidable rally, if direct hostilities were to break out.
In the fight over Syria, Iran is getting support from Russia and China, while the Saudis are aligned with their historic Gulf allies and the United States. Qatar is getting aid from Iran in its row with Saudi Arabia and other Gulf states.
In another development, Saudi Arabia promoted Mohammed bin Salman to Crown Prince from deputy Crown Prince. You should take this to mean that this is not your father's Saudi Arabia. Bin Salman has the kingdom being much more forward leaning, in the region, with adventurism in Yemen and verbally versus Iran.
For now, however, the oil market sees the fractured relationships as a negative for prices, worrying that the supply deal could unravel. After all, if the collective group is waging proxy wars in Syria and Yemen against each other, how can they possibly stick together to limit oil supplies?
That concern was laid bare on Wednesday. The Iranian oil minister floated the idea of deepening the production cuts under the agreement (which Iran is exempt from); the suggestion was dismissed within hours by three OPEC delegates.
The other factor underestimated by OPEC has been the rebound in U.S. production from both the Gulf of Mexico and the shale producers. We have only just begun to see the shale output hit the market from the attendant rise in the U.S. rig count. U.S. production could hit 10 million barrels per day by year-end, from 9.3 million, currently.
At this point, if there is no industry response, prices will grind lower. The OPEC, non-OPEC deal adherents need to do more, but it may be unpalatable for them to give up increasing amounts of global market share. China has actively shopped around for supply from sources, in response to the cutbacks.
It may sound like heresy, but the best tactic for Saudi Arabia may be to unleash its productive oil capacity and crash the market. They are by far the low-cost producer, and an ultra-low price environment would harm their regional rivals, although Iran knows how scrimp along very well, after years of sanctions.
While the bear case for oil prices is quite compelling, the new crown prince is an unknown quantity and tensions in the region could ignite and turn into direct confrontation between several of the Middle East's prime actors.
The most likely way forward for prices is lower still, into at least the mid-$30 range, which is worth playing for (read: short); however, insurance against an upside price spike from an exogenous event needs to be part of the plan.
Commentary by John Kilduff, a partner at Again Capital, an investment-management firm that specializes in commodities. Follow him on Twitter @KilduffReport.
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