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Goldman Is Right: The Oil Market Is Overly Jittery

Bloomberg carried a report late last week titled “Goldman Says Oil Market’s Too Jittery When There’s No Need to Be.” The report summarized a memo from Goldman Sachs analysts positing that the just-completed extension of the deal between OPEC and Russia to limit oil exports “indicates a reduced risk of both unexpected increases in supply as well as excess draws in stockpiles.”

The report didn’t address the reality that one of the main reasons why the crude markets remain jittery is very likely due to all the conflicting reporting in the energy-related news media leading up to that extension. While there was never any real, firm reason to doubt the extension would get done, pretty much every day in November was filled with speculative stories with click-bait headlines expressing doubts the parties could reach agreement.

While this is just the nature of the U.S. news media in general these days, the reality is that there has been precious little volatility in crude prices throughout the second half of 2017. In fact, on June 19, I wrote the following:

The mid-year review processes [for corporate upstream companies] I mention there are now coming to conclusions, and as a result of those reviews, we can expect the domestic rig count to level off and even perhaps decline slightly over the second half of 2017.

That’s exactly what has happened as these large independent producers scaled back their drilling budgets for the second half of this year, and it’s the main reason the frequent ups and downs in crude prices that had characterized the previous two-plus years have been replaced by what has been a steady rise in prices over the last five months. The key understanding to grasp in this equation is that, once OPEC and Russia agreed to artificially limit their exports, U.S. shale producers then become the de facto swing producer on the global stage.

 

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