Monday, August 29, 2016
Here we go again...
Oil prices fell roughly 20% in less than two months... The price of Brent crude oil – the European benchmark – dropped from more than $52 per barrel in early June to less than $42 per barrel in early August.
But just like we've seen a couple of times already this year, moves like that bring out the tough talk from the Organization of the Petroleum Exporting Countries (OPEC).
Because of the rapid decline in oil prices, Saudi Arabia – one of the largest oil-producing members of OPEC – says it will once again talk about cutting production. And Iran says it might even attend the OPEC meeting this time...
We already know how this story will end, though.
As you can see in the chart below, just the rumblings of a new production freeze reversed the fall in oil prices earlier this month...
But as I said above, we've seen this story play out twice already this year... back in February, when Saudi Arabia first announced talks of a production freeze... and again in April, when the OPEC countries met in Qatar and came away with nothing.
The same thing will happen this time because of one key factor: Iran is still a member of OPEC. As we've told you before, the relationship between Saudi Arabia and Iran is terrible, and Iran isn't about to agree to restrict oil production right now after 35 years of sanctions.
So even if the Iranians attend the meeting (they bailed out of the last one), the oil-supply situation isn't going to change.
Remember, this is all about market share. Saudi Arabia wants to keep the Asian markets to itself. It is competing with cheap oil from Russia. It's also troubled by new production coming from post-sanction Iran.
So Saudi Arabia opened its spigots all the way. It produced close to 11 million barrels per day in July... and then talked about freezing production. In other words, it produced as much oil as it could before saying, "We won't go any further."
Saudi Arabia produced a huge volume of oil last month... and it offset a lot of the production decline in the U.S. That's part of the reason why oil prices fell recently.
Oil prices are going to move like this for the next few months. We're in for a rough ride. Until Saudi Arabia, Russia, Iran, and the rest of OPEC quit flooding the market with oil, volatility is here to stay.
As I've told Growth Stock Wire readers over the past few weeks, we aren't ready to get back into oil companies just yet. However, it's OK to open small, speculative positions in high-quality oil-service stocks like Halliburton (HAL) and Schlumberger (SLB).
In my Stansberry Resource Report newsletter, we own a "basket" of producers. We're hoping to catch the uptrend in the early stages. But we're keeping our stop losses tight in case we're wrong. I suggest you do the same today.
"Oil-production freezes like this are useless political baloney," Matt wrote in February. "They don't fix the fundamental issue... and that's what really matters." Get all the details here.
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