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Business/Finance See other Business/Finance Articles Title: OPEC … Your Days are Numbered OPEC … Your Days are Numbered Brad Hoppmann | April 7, 2015 at 4:30 pm Crude oil jumped this week to its highest price since mid-February. Is the energy sector’s worst pain over? “Don’t count on it,” says Goldman Sachs (GS). They say oil prices can’t rise much until oil production shrinks — which will take months, maybe years. OPEC’s monopoly isn’t so valuable anymore. In fact, it isn’t even a monopoly. The sun is setting on OPEC. *** Say what you will about Goldman Sachs; they’ve been mostly right about oil prices lately. Their analysts forecasted $75 oil last October, weeks before the big drop. Goldman’s only mistake was being too optimistic. They aren’t making that mistake again. Check out this MarketWatch report on Goldman’s latest research. Thrilled about the recent bounce-back in oil prices? Well, it’s too early to get excited about the seven-week high reached on Monday, according to Goldman Sachs analysts, who predict we still have months of low oil prices ahead of us. While noting that a decline in U.S. rig count has been faster than expected, that reduction is still not enough to change the course of the oil market, they said in a report dated Monday. “It remains insufficient in our view to balance the U.S. market in 2016,” they said. “Prices need to stay low for longer to achieve a sufficient and sustainable slowdown in U.S. production growth.” Oil prices are staying low because U.S. shale production is staying high. Why is this, when the producers are losing money at today’s prices? I found an interesting answer. *** Oilprice.com posted a new analysis by petroleum geologist Arthur Berman this week. He drew some interesting connections between the last financial crisis and today’s oil glut. I’ll try to summarize what he said, but I recommend you read the whole article. Berman made this chart of oil prices since 1970, adjusting for inflation. The red areas are months in which the price went over $90. The 1979-1981 period coincided with the Iranian Revolution and Iran-Iraq War. The 2007-2008 run was a result of Chinese demand and low capacity from OPEC. What about the third and longest period of $90+ oil? Here is Berman’s interpretation. The record price of oil was an underlying cause of The Financial Crisis. It increased the cost of global trade, produced inflation and higher interest rates that contributed to real estate loan defaults, and caused demand destruction for oil and other commodities … Oil prices rebounded fairly quickly after 2008 because of a 4.2 million barrel per day production cut by OPEC in January 2009. Another reason for increasing oil price was the devaluation of the U.S. dollar by the Federal Reserve Board by lowering interest rates and increasing the money supply. Oil prices rose with a weak U.S. dollar and interest rates near zero in 2009. Other factors, notably the Arab Spring uprisings in the Middle East, also contributed to the price increase. As prices passed $80 per barrel in late 2009, tight [shale] oil production began in earnest. Low interest rates forced investors to look for yields better than they could find in U.S. Treasury bonds or conventional savings instruments. Money flowed to U.S. E&P companies through high-yield corporate (“junk”) bonds, loans, joint ventures and share offerings … The present oil-price collapse is, therefore, because of long-term high oil-price fatigue. It reached a crescendo in mid-2008 when oil prices exceeded $140 per barrel but was not specifically recognized as more than another of the factors that contributed to the Financial Collapse that followed. It is now clear that oil price was a central cause of that collapse. I added bold to that last paragraph. Berman thinks high oil prices actually caused the 2008 financial crisis. Then the response to that crisis — low interest rates, weak dollar and economic stimulus — created the U.S. shale boom that eventually brought oil back down. What will drive oil back up again? Berman says it will have to be higher demand. The present oil-price collapse is severe because of the accumulated, long-term price fatigue that has existed since late 2007. Although the immediate cause of the collapse is over-production of tight oil, the key to recovery is demand. However, where exactly will higher oil demand come from? Good question. • China has stopped building new cities and has a huge air pollution problem. • Europe is switching to renewable energy sources as fast as it can. • Americans, especially younger ones, have lost our taste for gas-guzzling pickups and SUVs. If demand doesn’t pick up somewhere, then U.S. shale and OPEC supplies will be more than adequate and prices will stay low. Here is Berman’s conclusion: The problem is structural and systemic and firmly rooted in the irresponsible funding of under-performing U.S. tight oil companies since at least 2010. The first step to price recovery is the severing of capital supply to companies that could not fund their operations from cash flow when oil prices were more than $90 per barrel. If this does not happen, we could be in for a long period of low oil prices. This is a crazy twist. Without intending to, Ben Bernanke may have killed OPEC. The cartel can’t control oil prices anymore because the Fed unwittingly financed the creation of another OPEC: the U.S. shale industry. I don’t see how the original OPEC can survive long-term. Its main asset was control of a critical resource that isn’t so critical now. They’ve lost their monopoly — and that’s great news for everyone else. *** Do you think Berman has this right? Did the Fed’s easy money create the shale boom? I’d love to know what you think. You can leave a comment on our website or send me an e-mail. *** Stocks spent most of the day trading in the green, thanks in part to strength in the energy sector and healthcare. West Texas Intermediate crude gained 3.5% on the day, settling at $53.98 However, equities slid slightly into the red going into the closing bell. The markets may have remembered that the Federal Open Market Committee minutes come out tomorrow afternoon. Also, U.S. dollar strength here in front of corporate earnings season also may have taken a bit of a toll. Here’s what else happened today. • Job openings rose to a 14-year high in February, according to the Labor Department’s JOLTS survey. • So why is anyone unemployed? Maybe job seekers don’t have the skills employers want or employers can’t pay enough to attract qualified applicants. • Wall Street analysts are trimming their earnings estimates at the last minute. Between the oil collapse and strong dollar, this quarter looks tough for corporate profitability. • FedEx (FDX) shares rose as the company announced a $4.8 billion deal to buy European delivery firm TNT Express (TNTEY). • Sen. Rand Paul (R-KY) threw his hat in the 2016 presidential ring. Will the libertarian-leaning Paul may make the Federal Reserve a campaign issue? We can only hope. Good Luck and Happy Investing, Brad Hoppmann Publisher Uncommon Wisdom Daily Poster Comment: Bye-bye OPEC. Whatever happened to "peak oil"? 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