OPEC’s Production Dilemma

OPEC is again staring down an empty oil barrel as the cartel struggles to develop a strategy for 2021 as US crude oil futures trade around $40 per barrel. In a meeting of the Joint Ministerial Monitoring Committee (JMMC), member states held talks this week to review compliance with previously agreed output cuts. Overall, OPEC and its partners (known as OPEC+) currently maintain collective production cuts of 7.7 million barrels per day but hope to reduce this amount by approximately 25% by early 2021. (For more, see: Can Crude Oil Stay Above $40?)

Concerns about the health of the world economy and the state of oil demand are adding to concerns that OPEC+ may delay planned increases in oil production. Talk this week among analysts is that OPEC is planning to postpone any output rise until at least 2021. But demand for oil from a major consumer, namely China, looks to be recovering already in 2020.

Data from the Chinese National Bureau of Statistics show China’s crude oil throughput registers are up year-on-year from January to August 2020 (see chart below) and continue to display a healthy growth trend despite a COVID-induced lockdown of the economy in the first quarter of the year.

 

China Remains a Major Oil Consumer

Data from the US Energy Information Administration (EIA) shows that China overtook the US in terms of annual oil imports in 2016 and imported more than 10 million barrels per day for the first time in 2019. China’s rising imports stand in marked contrast to the US, where oil imports are falling due to increased domestic shale oil production. Analysts are divided on how long that may last in the long run because shale oil requires a higher price than traditional oil to be cost-effective. Some US upstream companies cannot remain profitable in a sub-40 dollar per barrel oil price environment and have gone bankrupt in 2020.

 

Energy Investing Remains Difficult

Energy is by far the worst-performing sector in the S&P500 index this year, down 46.8%, followed by financials in a distant second place, down 16.9% in 2020. Energy-related ETFs have been beaten up as well. For example, the three best-known energy ETFs in the market for investment in the US -- the United States Oil Fund LP (AMEX: USO), Energy Select Sector SPDR Fund (AMEX: XLE), and the SPDR S&P Oil & Gas Exploration & Production ETF (AMEX: XOP) – are all down double digits this year.

Given the appalling energy performance in 2020, investors are beginning to ask if 2021 might be a better year for energy. This year’s dogs can be next year’s eagles and visa-versa. A few signals from OPEC+ this week could help investors make that investment choice this year. (For more, see: Will the US Energy Sector See a Rebound in 2020?)

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Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.