Oil Industry Changes And OPEC's Chagrin

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OPEC wants to manipulate prices.

But they do not have the same influence as they did before.

US Policies are largely the reason why.

OPEC seems furious. The oil cartel that used to dictate prices scenes to have lost their control and the reason is absolutely the production changes that happened in the United States, we are producing more oil than we have since the 1980s, and in doing so we have influenced the world supply of oil significantly enough to reduce prices and to reduce the influence of OPEC.

Anyone who has been involved in the market or who has studied the market for any length of time knows that OPEC has always been the focal point of oil globally and the decisions of OPEC have been able to influence prices beyond anyone else's control. A few years ago, when oil prices began to increase aggressively and gasoline prices made consumers reluctant to spend money, it seemed as if we had had enough.

Policies here in United States changed a few years ago and we began producing tremendous amounts of oil, tapping reserves that we have not tapped before. In addition, mandates were implemented by president Obama forcing car manufacturers to produce vehicles that had much higher fuel efficiency standards. This combination influenced both supply and demand in such a way as to influence prices lower, but it did something much more important than that.

By producing oil ourselves we became less dependent on foreign oil and therefore their influences on our prices as well. By taking the actions we have taken in recent years we have turned into one of the largest influencers of oil prices in the world, and although OPEC is still important their ability to influence prices by adjusting their output is far less influential than it was before.

By saying this I do not want to presume that OPEC will no longer be an influence, they absolutely will, they are just less of an influence than they were before and if the demand side of the equation continues to abate like our domestic policies are striving to achieve demand for oil as we have known it may change dramatically in the future.

Importantly, an influence like our domestic attempts to improve fuel efficiency take years, maybe even decades to achieve. From lee implementation, if memory serves me correctly, it will have taken about five years for auto manufacturers to comply with Obama's fuel efficiency mandate. This doesn't happen overnight, and any additional influences beyond what we have seen already will not happen overnight either, so although demand is reduced at least in part by this policy I do not think it is wise for us to surmise that future policies will have immediate influences on demand.

Clearly, OPEC is concerned that 2015 could be the worst year on record for demand for its oil, but that doesn't necessarily lineup with global demand probabilities. The reason OPEC may see the worst year on record in terms of demand for its oil next year is that the United States is producing oil at a very rapid pace, but that same rationale is also exactly why OPEC is no longer as influential as they were in manipulating oil prices.

Personally, I thought the manipulation that took place by OPEC in the past was monopolistic and a detriment to society's and companies who spend heavily on energy. Their influence, which was largely governed by their financial interests, could make life more expensive for every human being on the planet and giving control like that to a group whose sole purpose is to make money is somewhat foolhardy.

Clearly, there was never an official decision by world powers to appoint OPEC as the authority on oil, it just so happened that their region was a heavy producer, but after what has taken place over the past few years that certainly seems to be changing. I think the changes are for the better.

With that said, this weakness is the Oil ETF (NYSEARCA:OIL) has many people looking to buy it, but the risks are high. Our real time trading report for OIL (access the report) suggests that the ETF is weak on a near term, midterm, and long term basis, all support levels have broken, and it is also down about 35%.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: By Thomas H. Kee Jr. for Stock Traders Daily and neither receives compensation from the publicly traded companies mentioned herein for writing this article.