OPEC Gets Treated Like Rodney Dangerfield

 | May 22, 2017 | 12:00 PM EDT
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OPEC is getting no respect for the commitment it's making to oil production cuts in its upcoming Vienna meeting on Thursday, and that presents us with a really fine opportunity. 

The oil markets have really been turned on their head: There was a time in the not-too-distant past when we would all scoff at quotas from the OPEC cartel, a bunch of self-interested, undisciplined producers who raced each other to be the first to cheat on production quotas. 

Today, everything is reversed. 

Now, it is the producers here in the United States who are haphazardly turning up the production volume in the major shale plays, particularly the Permian and in the Gulf of Mexico. In these breakneck volume increases, they've shown absolutely horrible strategy, burning up their most core acreage at profit margins of, at best, $8 or $10 a barrel -- acreage that should earn them nearly $40 a barrel in profits in a "normal" market. They continue to guide for increased production, relying on OPEC to single-handedly fix the global supply-demand imbalance, but planning these production increases no matter what the Saudis ultimately do on Thursday. 

Who's being undisciplined now? 

The Saudis and OPEC, on the other hand, have so far managed to find accord on production cuts they undertook before the beginning of the year, with compliance levels that have astounded analysts -- but they have really gotten very little respect for their efforts. Everyone is assuming that some member (most likely Iran) will step out of line eventually. 

But not this time. 

Look at these further commitments of the Saudis and OPEC: 

They brought the Russians into the cartel deal on production limits -- the Russians. They've gotten little respect in the market so far for this historic alliance. 

They came to CERAWeek in March to find some accord with U.S. producers, and even though those efforts failed, they have continued to seek a combined plan for all oil producers around the globe in market rebalancing. 

They've even held meetings with the oil hedge fund speculators, sitting down with several major players at the Vatican with the help of Citibank. They've held further talks with several of the large private physical traders, including Vitol. This is an attempt to understand and come to grips with the financial influences of these traders on oil prices, an education that OPEC and the Saudis have never acknowledged, never mind admitting to needing. 

Tell me they're not committed to doing "everything it takes" to get oil prices stabilized and rising higher. 

They are. 

And still, most analysts, and a surprising amount of the speculative interest, believes oil prices are headed lower, not higher -- expecting either an agreement not to happen, a member to defect and immediately cheat or another interim top in prices in the low $50s. 

Like Rodney Dangerfield says, no respect at all. 

I've never seen an effort like this from the Saudis and OPEC before, and usually they say what they're going to do and mean what they say anyway. 

They've said they'll continue to work in every way they can to stabilize and help the price of oil move higher through the end of the year. 

I, for one, am going to give them the respect they deserve and believe them. Oil is headed higher.

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