The Great Oil Gambit
Jocelynn Smith
Oil has suffered a beating, thanks to the Saudis keeping the taps open wide.
The monthly report from the International Energy Agency (IEA) not only shows that this global oil chess match is progressing exactly how the Saudis have hoped, but that oil prices are destined to go sharply higher — possibly even sooner than Wall Street’s pundits would have you believe.
According to the latest IEA report, American production is forecast to drop by 400,000 barrels per day in 2016. In fact, non-OPEC production is expected to slip by approximately 500,000 barrels per day in 2016 — the most in 24 years.
We’ve seen significant production cuts in America already with the number of active rigs down 60% from the same period a year ago. And let’s not forget that, as Jeff Opdykereported earlier this month, “There are at least 46 projects that major energy exploration companies around the world have cancelled.” That’s an excess of 20 billion barrels of reserve production bypassed due to low oil prices.
Sure, inventories are up — with about 2.4 million barrels per day stored above year-ago levels.
But we are also seeing a reawakening of demand through a mix of low prices driving consumers back to their gas-guzzling vehicles and the slow, steady recovery of the global economy. The IEA forecasts oil demand hitting a five-year high of 1.7 million barrels per day in 2015 and demand rising another 1.4 million barrels per day in 2016.
Can you see the collision course we’re on?
Cheap oil is crushing oil production not only in America but in any country that can’t pump it out of the ground for less than $30 per barrel. You can only run in the red for so long before you simply have to shut down production … and that’s what we’re seeing across America and the North Sea. And to make matters worse, companies have stopped planning for the future — by killing exploration projects — in an effort to stop the hemorrhaging happening today.
We’re nearing the end of this chess game. The Saudis’ goal was never to keep oil at these low levels, but to knock out many American producers. Very soon, demand is going to overtake dwindling supply (thanks to production cuts and a lack of exploration) and the price of oil is going to snap back like an overstretched rubber band.
Don’t wait for our king to be placed in check. You can see how this game is going to end and you can take steps now to take advantage of the rally in oil.
Smith is the Senior Managing Editor, Sovereign Investor Daily