OPEC Meeting To Crush Fracking Stocks?

| November 26, 2014 | 0 Comments

oilTomorrow is a very big day for the oil market…

That’s when the Organization of Oil Exporting Countries (OPEC) is meeting in Vienna to discuss the recent downturn in the price of oil.

As you may be aware, West Texas Intermediate (WTI) crude has collapsed from $106 a barrel in June 2014 to $74 in recent trading.  Meanwhile, Brent crude has plummeted from $114 to $78 in the past five months.

Not surprisingly, oil E&P stocks are suffering a dramatic downturn as well.  The SPDR S&P Oil and Gas Exploration and Production ETF (XOP) has spiraled down 28% since late June.   XOP holds fracking stocks like Synergy Resources (SYRG), Cabot Oil & Gas (COG), and EOG Resources (EOG).

Clearly, XOP is in bear market territory. 

But here’s the deal… 

Despite rumors to the contrary, it’s highly likely OPEC cuts their 2015 production outlook in tomorrow’s meeting.   Venezuela, Iran, and other OPEC members are seeing their national budgets bleed badly with oil below $80.

But budget problems are just the tip of the iceberg for OPEC.  If the Middle Eastern oil cartel doesn’t agree on a unanimous production cut to support prices, there’s really no reason for it to exist at all.

Quite simply, the legitimacy of the organization is coming into question right now.

Think about it…

OPEC has been the price setter in the global crude market since the 1970s.  Since they controlled the lion’s share of global production for the past 40 years, they had the ability to control price on a global scale.

But now things are changing.  Thanks to fracking technology, the US is producing around nine million barrels of oil per day- multi-decade highs.   Surging US output means OPEC now has to compete with US producers.

And listen to this…

There’s a rumor floating around that Saudi Arabia, the top OPEC producer, is more concerned with keeping market share than propping up prices.  Some even suggest the Saudis are trying to drive US shale producers out of business.

If true, that’s a very risky play…

While large swaths of shale plays are becoming uneconomic at current prices, US producers can likely withstand a low price environment longer than the Saudis realize.  Remember, most US producers hedged their oil production at much higher prices to protect cash flows.

The protection won’t last forever, but I bet it can outlast a game of chicken with OPEC.

It’s a tough predicament, but I just don’t see OPEC keeping production at current levels.  They’re talking tough now, but ultimately the Saudis can’t risk losing their ability to set prices.

That brings me back to XOP…

Fracking stocks have been hit hard the past few months.  But now many of them are trading at bargain basement prices.  Despite this fact, only very aggressive investors should consider holding XOP and other fracking stocks through tomorrow’s meeting.

While I believe crude is bottoming at current levels, there are simply too many variables to contend with tomorrow.  Any of which could send crude higher, or lower, in a hurry.

Until Next Time,

Justin Bennett

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Category: Crude Oil

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.