OPEC oil production jumps unexpectedly during November. No doubt tensions are sure to rise.
The Reuters monthly survey showed production continues to climb past the cartels limits. In view of rising production, cartel members are sure to disagree about the future. Who should produce more? Who should produce less?
One thing is for sure, cheating is bound to happen.
For sure, COVID-19 has devastated economies around to the world. As a result, countries are desperate to raise revenues. And they will step on each other to do so. In fact, investors should expect OPEC members to boost production past set limits.
Unfortunately, trouble lies ahead as investors tackle a pandemic weakened economy and oil production ramps up.
What happens if OPEC oil production jumps next month?
While OPEC members have a history of cheating each other, our best expectations if for oil production to plateau.
If not, and oil production increases expect the following:
- A weak global economy thanks to COVID-19
- Continued weak demand of oil
- Spending on new capital projects to be postponed
- Prolonged and slow recovery once pandemic ends
What about the recent big energy rally?
Well, it all depends on OPEC. First, if OPEC can agree on a production cut the rally has room to run. Second, flat production could mean a sideways price action. Finally, increased oil production likely will spell doom for the rally.
In fact, past rallies have failed because of unexpected production increases. Unfortunately, this is how the oil market is positioned at the moment. Either way, investors are at the mercy of OPEC.
At the present time, the xle chart below outlines the worst case scenario.
Conclusion
All things considered, OPEC routinely upends the energy sector because of their inability to get along. All to often, one member cheats to make a buck while resentment spreads through the cartel. Not surprisingly, share prices trade in a manic behavior. Those with a low risk tolerance might want to steer clear.
In the long run, the energy sector will recover. But, it will take time. Companies remain focused on maintaining existing infrastructure and surviving the bear market. That said, bargains can be found in the energy sector, but it will take some digging.
