Is OPEC Playing a Risky Game?

Oil prices are soaring this morning after OPEC’s lackluster response to tightening oil markets. WTI crude prices have surpassed $72/bbl for the first time since early July, quickly closing in on the annual high closing price just above $74/bbl. This morning, crude prices are trading at $72.21, up $1.43 (2.0%) since Friday’s close.

Fuel prices are rising along with crude, picking up significant gains this morning. Diesel prices are just pennies away from their high-water mark of $2.30, though gasoline prices are a long way from their annual highs after the recent switch to winter-grade fuel. Diesel is currently trading at $2.2740, up 4.8 cents (2.2%) since Friday’s close. Gasoline prices are $2.0470, 3.0 cents (1.5%) higher.

OPEC met over the weekend to discuss their production agreement, and markets had generally expected some statements about the group increasing production. When the group adjourned, the collective message was that the group might increase production if their customers requested more oil – a very noncommittal statement. With spare capacity stretched thin globally, it’s tough for OPEC to increase production without risking a more severe outage.

OPEC is playing a delicate game, allowing prices to rise as Iranian output falls. While their arguments on spare capacity are legitimate, the group must also balance the cost of high prices to their long-term competitiveness. Keep in mind that unlike 30 years ago, OPEC does not control global oil prices. At best, they can influence them, but North America and other production regions have made the world much less reliant on oil. For OPEC, higher oil prices drive two major competitive threats:

• American Production. As oil prices drift higher, American producers are incentivized to drill for more oil in more areas. US production is already forecast to be at least 11 MMbpd in 2019, with upside if prices remain very high.
• Alternative Fuels. In 2013 and 2014, environmental groups and price-conscious consumers were aligned in pushing for electric vehicles, CNG, etc. to reduce energy costs. When oil prices collapsed, the appeal of alternative fuels declined. Now that prices are once again on the rise, more consumers are reevaluating their energy spend and looking for cheaper options.

Storm Alert

Mansfield is extending its Orange Alert for NC, SC and Virginia as a precaution as remnants of Hurricane Florence loop around to potentially bring more rain to the flooded areas. Currently labelled Invest 98, the storm is expected to scrape the east coast. Models are still unclear whether Invest 98 will reach Tropical Storm status before approaching land; however, even without strong winds, additional rainfall could cause hazardous conditions in flooded areas in the Carolinas.

To the South, Tropical Depression Kirk is making its way across the Atlantic and is very likely to strengthen to a Tropical Storm over the next few days. The storm is following the same path as Isaac, which fizzled out before causing any significant impacts to the US. Mansfield will monitor the storm to see whether it too will blow out, or whether it continues strengthening past the Lesser Antilles.