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OPEC to Declare War on the US on Thanksgiving Day 


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Marin Katusa, Chief Energy Investment Strategist
Casey Research
November 26, 2014

On Thanksgiving Day in the US, the Organization of the Petroleum Exporting Countries (OPEC) will meet in Vienna. The hot question of the day is, of course: Will OPEC cut oil production or not, and by how much?

Saudi Arabia alone makes up 25% of OPEC’s oil production and is OPEC’s controlling member. Will Saudi Arabia want a reduction, and will OPEC make a meaningful production cut of, say, over 2.5 million barrels of oil per day (bopd)?

2.5 million barrels—that’s the amount the current bulls have been speculating about. (In comparison, the average production cut by OPEC over the last 30 years was around 1.25 million bopd.)

My answer is no; there’s no way that OPEC under Saudi Arabia’s watch will cut production anywhere near 2.5 million bopd. At most, it’ll make a nominal cut, most likely between 500,000 and 1 million bopd… closer to 500,000, if any cut at all.

A senior officer of OPEC agrees with me, as you’ll see in the video interview below.

A Few Important Aspects of OPEC’s Oil Production

Even if OPEC does agree to cut oil production—and anything below 2.5 million bopd isn’t going to change the current oversupply of oil—we fully expect some of the member states to cheat and not stick to their production quota. That’s an assumption the aforementioned OPEC officer confirms.

The countries I expect to cheat are the ones with big deficits and no current cash surpluses. Venezuela and Iran are the first that come to mind, but I’d also expect Nigeria and a few others to cheat.

More important, the last time OPEC cut oil production in 2009, it was the Russians who took advantage of the production cuts, increasing their oil production and international market share. This is something OPEC hasn’t forgotten.

OPEC invited Russia to be an observer in the organization’s meetings during that time in 2008 and 2009, and it’s no secret that it expected Russia to also cut oil production. Well, the Russians did what was best for the Russians, and they will continue to do so, as they should.

So What’s Different This Time?

US shale production is now a serious contender in the oil game—and this is where I disagree with my guest, who was a senior officer with OPEC for eight years. His opinion, as you’ll see in the video, is that the US shale sector is not yet a threat.

His name, by the way, is Touss Sepehr, and he’s a great guy.

I first met Touss last year through a mutual friend, Jonathan Roth, chief content video officer here at Casey and a renowned TV producer who has worked for the Biography Channel and Discovery Channel.

Touss knows his stuff. Whenever I have a question about OPEC I can’t figure out, he’s my contact. Where I disagree wholeheartedly with Touss, though, is his comments about the US shale sector.

Here at Casey Energy, we’ve been very early believers in US shale production; we’ve been discussing the shale oil and gas potential of various North American formations since 2006. Technological innovation within the US shale sector is only getting better, and I’m convinced the sector will survive the current drop in oil prices—an opinion that isn’t shared by the media and OPEC.

Yes, certain formations and companies won’t be viable, but that’s irrelevant, because not all shale formations are the same, and not all shale oil producers are the same.

Why Is OPEC Declaring War on the US Shale Sector?

Because it recognizes that future exports of refined products (natural gas liquids [NGL], condensates, liquid natural gas [LNG], and oil) will become a major competitor to OPEC’s current market share.

I believe the US shale sector will actually win this battle, because of a critical weapon the US has that OPEC lacks: American innovation. Never, ever underestimate American innovation. The energy sector will find solutions to the current crisis; lower drilling costs, more effective fracs, super pads, and super fracs will all improve efficiency.

But there’s no doubt that the fight will get ugly, and we can expect further pressure in the current oil markets. But that’s good, as I see major opportunity here.

In this month’s Casey Energy Report, we’ve written up a great company that will not only be profitable in a low-price oil environment, but will actually grow its profits.

This company is the absolute best at what it does in the world, and in my opinion, everyone should have it in his or her portfolio.

Now, without further ado, here’s the video interview with Touss Sepehr.

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