The earth is rumbling under the feet of oil and gas companies. In precisely 10 days, we will know what OPEC has decided to do with production. A production cut will keep oil prices stable to higher, possibly pushing them near $60. U.S. firms will love this.
When OPEC and Russia reduced the supply glut last year, oil prices nearly doubled. That helped a lot of oil derivative plays, especially the master limited partnerships that are so dependent on the industry’s build-up in order to earn a profit. It also helped out commodity strategy funds, with oil being the biggest single weighting in most of the indexes. Investors shelved their worries about oil production. Now they are back.
Cutting down the surplus inventory is not as easy as OPEC might want it to be, says Naeem Aslam, chief market strategist for ThinkMarkets in London. “Keep a close eye on OPEC’s meeting on the 25th of May. If they are serious about taking barrels out of production, doubling the cut they applied at the beginning of the year is the bare minimum they have to do,” he says. To put that in numbers, this means another 1.2 million barrels. Last week’s forecast suggested a decrease of 300,000 barrels a day for OPEC crude in 2017. “Even if we were to trust these figures, it would mean that…inventories will remain stagnant,” he says.
But that’s not the only risk for the oil market right now. The big question is to what degree the members will follow-through with a new deal. The real impact will be felt in the second half of the year. Get prepared for headlines about real sacrifices and the possibility of no deal. No deal sends oil back to the $30s.
Look for OPEC, Russia and U.S. shale producers to continue being at odds. Should OPEC push harder, we will see some painful decisions from its key members, namely Iran and Saudi Arabia, but also Venezuela, which is on the verge of bankruptcy and civil chaos.
No matter what OPEC does, the one thing oil investors here will watch closely is the break-even price for shale and the MLPs that have benefited from the shale oil and gas boom. The Algerian Master Limited Partnership (MLP) Index fund is down nearly 2% this year, while the iPath S&P GSCI Crude Oil Total Return (OIL 28,42 0,00 0,00%) ETF down a whopping 18.2%.