Dave Gonigam

Oil has climbed down more than 4% in two days. At last check, a barrel of West Texas Intermediate fetches a little over $93.

The big factor: Yesterday’s weekly crude inventory report from the U.S. Department of Energy. “The nation’s supply of oil is now 7.2% above year-ago levels,” reports The Associated Press, “and the highest since July 27, 1990, when it was at 391.9 million barrels.”

[Heh... The AP failed to note that Saddam Hussein invaded Kuwait six days later and oil prices more than doubled in a matter of weeks to $46.]

Still the numbers underscore a theme Byron King has been hammering on for more than a year: “U.S. oil production (and output from Canadian oil sands, too) is rising.”

Obvious, you say? Sure. But we say it anyway to set up a less obvious point…

“Every new barrel produced in North America,” says Byron, “displaces a barrel of oil otherwise imported to North America from overseas.

“Those cargoes of foreign oil that used to set course for Houston still have to go somewhere. Lately, many of those ships have moored near terminals in Europe, where they discharge crude that competes against North Sea oil. The effect is to set a cap on the oft-quoted ‘Brent’ price for crude.”

The gap between Brent and West Texas Intermediate has narrowed sharply — from more than $22 two months ago to $12 this week.

“Even with Brent at a steady $110 per barrel,” Byron goes on, “my hunch is that OPEC managers are sleeping fitfully.

“Why? Because every new barrel of WTI and Canadian oil — of which there are more and more, thanks to fracking — displaces a barrel of OPEC oil in the North American market. Thus, the U.S. is importing less and less oil, and that’s not just a temporary thing. It’s a long-term trend. Because of new technology, the ‘new’ barrels are coming.

“Yet OPEC barrels are also still coming to the surface, every day, in fields across the Middle East, Africa and elsewhere.” Those barrels have to go somewhere, and often as not, they’re going to Europe. That’s still more downward pressure on Brent.

“The bottom line is that OPEC is big and important. Collectively, OPEC players produce a lot of oil. But to paraphrase the late Paul Harvey, the ‘rest of the story’ is that OPEC is losing pricing power over its oil.

“Sure, any OPEC nation is welcome to close the valves, starve the markets for oil and help goose the Brent price upward. And then that nation is faced with selling less oil, even at a higher price. How long can that work?”

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Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.