Oil And The OPEC Meeting - Something To Believe In

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Includes: CHK, COG, COP, CVX, EOG, OIL, PSX, PXD, RICE, USO, XLE, XOM, XOP
by: Markos Kaminis

Summary

The two-day compliance meeting of OPEC and non-OPEC producers concludes today.

Oil prices have drifted lower ahead of the result, out of fear of a bad result.

It's a trend we've seen recently, but we expect to turn around as tangible factors for sustained oil price rise have developed.

I'm looking for a well developed and worded result from this week's meeting.

If the producers produce a surprise, it could also be a positive one.

Oil dipped yesterday before recovering, and it is meandering today as anxious energy market investors fear a bad outcome from the OPEC meeting in Abu Dhabi. Oh ye of little faith, do you really think OPEC will let you down? All that needs to come of the OPEC compliance meeting is some reassurance, preferably supported by substantive game-plan for non-complying members of the consortium. And if the oil producers provide a surprise, it could also be positive, in my opinion.

Security 08-07-17
United States Oil (NYSEARCA:USO) -0.3%
iPath S&P GSCI Oil (NYSE: OIL) 0.0%
Energy Select Sector SPDR (NYSE: XLE) -0.8%
SPDR S&P Oil & Gas E&P (NYSE: XOP) -1.6%
Exxon Mobil (NYSE: XOM) -0.1%
Chevron (NYSE: CVX) -0.3%
ConocoPhillips (NYSE: COP) -0.9%
Phillips 66 (NYSE: PSX) -0.6%
Rice Energy (NYSE: RICE) -1.5%
Pioneer Natural Resources (NYSE: PXD) -4.2%
Cabot Oil & Gas (NYSE: COG) -1.4%
EOG Resources (NYSE: EOG) -0.9%
Chesapeake Energy (NYSE: CHK) -4.0%

Oil prices have tended to trend upward lately after shedding price on fear in anticipation of events. It seems traders are unsure of recently gained ground, and so they take risk off ahead of data and then they trade higher in relief of it. That's because a negative tone still pervades the energy pit, but that should be changing. I outlined why in my recent report, Why Oil Prices will Breakout - The Demand Driver.

Still, ahead of last week's U.S. petroleum inventory data, and again ahead of this week's OPEC meeting conclusion, oil prices are showing concern. Oh, come all ye faithful and buy oil on this weakness, because it has got some tangible reasons to rise in the months ahead. I'll be discussing another one of those factors in detail either today or tomorrow here. We already know the global economy is stepping up its pace, which requires an increase in energy demand and use.

After OPEC's May meeting, oil prices dropped precipitously for a month; by the way, we predicted that here and recommended investors sell the news. It was not because of compliance, but because no new news was provided, or no new catalyst to believe in. Traders were looking at shifty U.S. inventory data and doubting OPEC's production cuts were enough. But as the season for draws has ensued, and given some factors aiding those draws along (I'll be covering that in a follow up report), traders have found something to believe in. It has helped also that rig count additions have slowed, and in some cases turned completely around, like last week when the count decreased for North America.

Investors do need to see better compliance from producers or else the credibility of the quotas comes into question and its support unwound. And there have been some negative reports of some producers spouting out about the cost of production cuts to their economies. A couple producers are not attending today, though one of those is Venezuela, and it has higher priorities these days. Thus, doubts have some credibility and price action is based on real concern. Still, producers understand the repercussions of failing to assure the markets of compliance.

I'm remembering that song from Offspring, Something to Believe in. That's what investors are hoping for out of the OPEC meeting conclusion today. The two-day meeting started yesterday, giving us two full days to worry. However, two days are better than one for developing and drafting a well planned and worded game-plan for those producers having difficulty keeping to quota. And who knows, maybe there'll be some sort of restriction on one of the unrestricted producers that would surprise the energy pit and send oil prices higher. I have to believe that OPEC has learned its lesson from price action following meetings, and will provide something to believe in today. But even if OPEC does nothing more than provide lip-service today, improving economic demand is important enough to hold oil here. For more of my regular work on oil and the energy market, readers are welcome to follow the column here at Seeking Alpha.

Disclosure: I am/we are long USO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: My position is via options.