Schork Oil Outlook: OPEC Doesn't Control Crude Anymore

Nymex or OPEC… who are you going to believe?

Energy prices were mixed yesterday (Tuesday). Equities were flat, despite U.S. advanced retail sales for August coming in comfortably above analyst expectations. The dollar fell against the euro while gold hit record highs — are traders choosing base commodities over energy? Is this is a sign of risk aversion?

Either way, the crowd is looking for a 2.50 MMbbl draw in crude oil inventories from the DOE. Meanwhile, natty finally crossed above the 4.000 barrier but could not close above it.

Yesterday Abdalla El-Badri, secretary-general of OPEC, stated that the consortium is “comfortable” with oil prices between $70 and $80.

Unlike the hotshots on Wall Street, El-Badri seems to acknowledge the crippling effect high oil prices could have on the economic recovery, which he surmised by saying, “We want to leave things as they are for the time being. We don’t want to see a double-dip recession, as it would affect everybody negatively.”

We agree wholeheartedly that a double-dip is bad news, but at this point the price of oil, and a double-dip recession, are no longer under OPEC’s control. Today’s issue of The Schork Reportgraphs OPEC production against the front month Nymex WTI price. The clearest signal probably appears in the run up to the pop of the commodity bubble in summer 2008.

Increasing OPEC production had, pretty much, no effect on crude oil prices in the ’00s. Consider that WTI hit a low of 19.56 in December 2001, while OPEC production stood around 24 MMbbls/d (we’ll keep the figures round because the actual amount is always a mystery). Prices began to rally and by July 2004 were up 120.77% to 43.80, while OPEC production stood 22.66% higher at 30 MMbbls/d.

At this point, production plateaued and between July ’04 and July ’07 averaged 30 MMbbls/d. But over the same period, WTI continued to rise; in fact by July ’07 it was trading 78.56% higher at 78.21.

By the time OPEC increased production it was too late, and although it soon hit near-maximum production levels, prices still rallied close to $150. The bottom line is that at this point OPEC rides the coattails of the markets, not the other way around. And, while we appreciate Mr. El Badri’s sentiments, that’s the way it should be.


Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.