Oil: Heavily Overbought Market Will Continue Rising, Pushing Price

It’s already up about 60% or more on the year, and all indications are that it’s massively overbought and due to correct. Yet, like anything where its implied demand attracts more attention than its actual use, prices are expected to continue rising.

This is especially after Monday’s move by to reject any notion of adding more supply than it has committed to a market of which it was in absolute control. Prior to Monday’s meeting of the 23-nation oil producing alliance, there had been speculation it might agree to adding beyond the 400,000 barrels per day of new supply it had committed to through end-April.

But once the video linkup was over among the 13-member Saudi-led Organization of the Petroleum Exporting Countries and their 10 allies steered by Russia, the message was clear: there would be no change.

There was no official statement on the matter either. But a Saudi official told the Wall Street Journal that “the kingdom is comfortable with the current price range and feels it won’t weigh on demand for oil.”

All charts courtesy of SK Charting

Filling in the blanks were more off-the-record comments from OPEC+ delegates. One who actually told Reuters:

“We are scared of the fourth wave of corona; no one wants to make any big moves.”

That sounds like a tinge of drama given the flat-lining caseloads for the Delta variant over the past few weeks and OPEC+’s monthly (or as-required) virtual meetings that allows the group to pull back production whenever necessary.

The alliance’s virtually unchallenged hold on supply-demand is another reason that allows OPEC+ to do as it pleases. The “Drill baby, Drill!” battle cry associated with the American oil industry has vanished and in its place are drilling companies that are more risk-averse than ever in the seven years that shale oil became a global phenomenon.

The once freely-spouting Permian and Bakken oil basins of America are producing way-below capacity as drillers try to please their shareholders with dividends instead of frustrating them with losses like before. It’s fair to say the industry’s new maxim is: if it ain’t broken, don’t fix it (i.e., if OPEC has control of the market, don’t be a hero trying to challenge it).

As Scott Sheffield, who heads US oil driller Pioneer Natural Resources (NYSE:), told the Financial Times last week:

“Everybody’s going to be disciplined, regardless whether it’s $75 , $80 Brent, or $100 Brent. All the shareholders that I’ve talked to said that if anybody goes back to growth, they will punish those companies share prices.”

And if there were any illusions, Sheffield makes absolutely clear that the oil market is “really under OPEC control”.

Mike Wirth, CEO of Chevron Corp (NYSE:) another major US oil driller, told Bloomberg News lately:

“There are two signals I’m looking for and I’m only seeing one of them…We could afford to invest more. The equity market is not sending a signal that says they think we ought to be doing…