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Analyzing The Collapse Of OPEC+

Harrison Schwartz profile picture
Harrison Schwartz


  • Monday's sell-off resulted in extreme losses for energy commodities, net energy exporting countries, and cyclically-sensitive sectors.
  • Losses can be tied to Russia's departure of "OPEC+" and plans to drastically increase production by both Russia and Saudi Arabia.
  • The collapse of OPEC+ brings Saudi Arabia's power over energy prices to essentially zero as OPEC now produces less than half of global supply.
  • 2020 is likely to see global oil production increase substantially while evidence from China suggests an unprecedented drop in consumption.
  • Given the likely glut, investors should not expect crude prices to recover this year, drastically increasing bankruptcy risk for U.S. producers.
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In the heat of market volatility, it is often difficult to zoom out and see the situation for what it is. The disastrous global crash in equity markets on Monday can be tied to the collapse of OPEC's power over oil prices over the weekend. In order to begin to understand the situation better, let's quickly recap the damage by commodity, sector, and region.

First, take a look at a table of Monday's percentage price changes by commodity:

Ticker Asset

"Crude Monday" Price Change

(USO) Crude Oil -25.32%
(UGA) Gasoline -18.25%
(SLV) Silver -1.85%
(DBA) Agricultural Commodities -1.73%
(DBB) Base Metals -1.03%
(GLD) Gold 0.17%
(UNG) Natural Gas 5.86%

As you can see, oil fell by a staggering 25% followed by gasoline. This was the second-worst day in oil history beaten only by the 1991 gulf-war crisis.

Interestingly, natural gas, which is usually correlated to crude, had a great day. This likely relates to my theory that crude and natural gas are negatively correlated due to the hedge-fund crude/nat-gas pair trade strategy that has been taken to an extreme.

The drop in crude oil prices had a pronounced impact on equity markets with the S&P 500 seeing its worst day since 2008. Cyclical and inflation-sensitive sectors were hit particularly hard as you can see below:

Ticker Sector/Industry

"Crude Monday" Price Change

(XOP) Energy Producers -36.87%
(XLE) Energy -20.14%
(KBE) Banks -14.72%
(XLF) Financials -10.72%
(XLB) Materials -9.36%
(XLI) Industrials -9.22%
(XLK) Technology -7.59%
(XLY) Consumer Disc. -6.30%
(XLU) Utilities -5.44%
(XLV) Healthcare -5.20%

Most obviously, E&Ps were hit extremely hard with a staggering 37% blow. This was XOP's worst day in its history. That said, even risk-off sectors like utilities that stand to gain from the extreme decline in long-term interest rates saw significant historical declines. This

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This article was written by

Harrison Schwartz profile picture
Harrison is a financial analyst who has been writing on Seeking Alpha since 2018 and has closely followed the market for over a decade. He has professional experience in the private equity, real estate, and economic research industry. Harrison also has an academic background in financial econometrics, economic forecasting, and global monetary economics.

Analyst’s Disclosure: I am/we are long SLV, DBA. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (15)

Interesting article, but where did you get the $65 avg US cost of oil? That maybe true for some marginal shale drillers, but I doubt even that is correct. I believe may shale drillers will have revenue below costs, at recent and newer prices, but a total cost of $65 would have shut many of them down already.
Halfdayfree profile picture
@Harrison Schwartz Great read - thank you! Do you have any view to the oil/gas infrastructure in the US - I mean the MLPs?
Harrison Schwartz profile picture
Hi izhangying, thank you. I'm very bullish on MLPs in the long-run and do not believe they will be hit as hard as producers in the short-run. That said, the ongoing volatility will likely be bearish for MLPs. Particularly if rig-count declines due to oil being below production costs.
Halfdayfree profile picture
Thanks - that's my hunch. As of now, the MLPs as a group are not quite as "bad" as mall REITs where even the best house in the neighborhood (SPG) is spiraling down, down, down...
beezwaxxxx profile picture
the arabs and russians manipulate the market like before
I thought they manipulated bee hives @beezwaxxxx .
RJJ1 profile picture
China will benefit on 2 fronts, cheap oil and dramatic sales of Ramen noodles because that is what SA and Russia will be eating for the next 2 years.
That's hat I eat everyday in the US, Ramen Noodles. @rjj1960
This article assumes nothing will change. The Russian-Saudi disagreement is written in stone.
I doubt any agreement between Russia and the Saudi are written in stone. I believe erx is a good bet at this point.
Bryan Shealy profile picture
Putin's mission is to obliterate shale oil. He is preparing for an economic war on this front.
Putin didn't know MBS was going to throw a 4 year old temper tantrum. Putin will now shift from taking out US shale to taking out Saudi oil. @Bryan Shealy

@shaner1 @Sir V-i-val @PT Larry @RS055
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