The Future Of Oil: The Middle East Effect Round 2!

I feel like I’m on crazy pills!

For weeks now I’ve been waiting for the price of oil to face a modest pullback. Point being, the current price of crude ($95+) is higher than the simple supply and demand fundamentals are leading on.

Supply and demand be damned(!) — the price of crude keeps inching higher.

Alas, it turns out we’ve been dealt a healthy dose of the oil market’s most sinister force: the Middle East Effect…

Since mid-April the price of crude is up over $10 per barrel, closing yesterday north of $98.50 and very close to the $100 threshold.

Of late, the market is feeding off the news of a flare up in Syria. Sure, Syria isn’t a major oil producer but when traders start seeing the probability of U.S. intervention in the Middle East — what, with U.S. troops staging military games in nearby Jordan — the price for oil gets a swift kick in the britches.

Here’s a look at just how this Middle East Effect has played out (including the most recent rally):

Middle East Effect On Oil Prices

Each time the market heads lower towards the $85 threshold a Middle East event spurs prices higher. I won’t get in to conspiracy theory in this write- up — but believe me, there’s valid reason to believe that OPEC has all the incentive in the world to keep the threat of volatility alive and well. After all, the $10 bump in prices since mid-April is nothing but money in the bank for OPEC producers.

Besides conspiracy, there’s plenty to cover…

Fact is, I’m still waiting for the straw that breaks this 5-hump camel’s back. Indeed, sooner or later we’re going to see oil prices drop below that $85 threshold — a move that will likely happen in quick order.

The reason for a coming break in oil prices is simple: there’s simply too much supply coming online — in the form of U.S. shale and Iraq post-war production — and not enough latent demand to keep the price of oil supported.

So far the straws are starting to pile up on the camel’s back. Just as we’ve predicted…

“North Dakota’s Bakken Hits Record Oil Production Level in April” reads a headline from Bloomberg this week. The Bakken shale formation surrounding Williston, ND has been gradually increasing efficiencies and production. Current production from the formation exceeds 725,000 barrels per day (bpd.)

We’re seeing a similar trend from the Eagle Ford formation in South Texas. “Texas’ Eagle Ford hits record oil production” says MarketWatch. As it stands the fast-growing Eagle Ford formation is producing over 525,000 bpd — that’s nearly double the amount produced at this time last year.

Add the two together and we’re seeing over 1.25 million bpd from these two formations. And remember, that U.S. godsend, shale production sprouted from just about nothing in 2008!

The next straw to add on the camel’s back is more akin to a bale of hay! I’m talking about the coming wave of production from Iraq.

The war entangled region is quickly gaining barrels and expects to boost production by 29% in 2014, according to a senior official — year over year that represents an extra million bpd. Looking ahead, Iraq could see production growth of another 4 million barrels per day, by 2020.

A solid example of how this is happening comes to us from yesterday’s Wall Street Journal, “First production from Iraq’s Majnoon field is expected in July.” The Majnoon field, according to operator Shell Oil Co., is set to reach 175,000 bpd by the end of 2013. A ramp up like that is no small potato — and that’s just one field!

So you see, there’s plenty of oil set to come online in the next few years — and with prices still buoyed over $90 production in the North American shale patch is going to keep steaming ahead.

While The Straws Pile Up — Domestic Producers Are Still Benefiting!

In the meantime this is all gravy for U.S. producers. The one silver lining to the Middle East Effect is that domestic producers will enjoy selling their crude at higher global prices.

Remember, oil is a fungible, efficient market. Action in Syria or any other hotspot increases the global price and benefits U.S. producers. The same trend also benefits U.S. petroleum product exports. Petroleum product exports like gasoline and fuel oil are absolutely booming — exports are over three million barrels per day, more than double that of 2007.

While the Middle East Effect continues to keep global prices buoyed, hold on to your domestic producers. A company like ConocoPhillips (COP), as I recall from a company insider last year, can breakeven with an oil price of $37 a barrel in the Eagle Ford. Whether oil prices stay high near $100 or pullback to the $85-level, the company will keep churning cash and paying its dividend. Seems like a safe bet to me.

Keep your boots muddy,

Matt Insley
Original article posted on Daily Resource Hunter