The first thing that I think about whenever someone brings up the word oil in the film Quantum of Solace. Anyone who is a James Bond fan has a VERY stark opinion on this film. I’ve always enjoyed it. The villain kills a critical scene where the MI6 assistant sends Bond back from the field after being immersed in oil and left in a hotel. It’s a throwback reference to the similar fate of Jill Masterson in the great Bond film Goldfinger (she was painted gold and left in a similar stance). Uplifting? No. But let’s keep in mind that Amazon.com (NASDAQ:AMZN) is on the verge of buying MGM Studios – and with it the rights to the James Bond franchise.
Does anyone else find it weird that one of the world’s wealthiest people – who actually looks like the Bond supervillain Blofeld if you squint hard enough – is now going to own 50% of the rights to the franchise?
Anyone… anyone? John Logan, who co-wrote the screenplays Skyfall and Spectre, said that the merger deal gives him chills in the New York Times over the weekend
Okay, Garrett, Move Onto Oil
The second thing I think about when we mention oil is OPEC. The Organization of the Petroleum Exporting Countries is a global energy cartel designed to manage production among international oil-producing nations and keep a support level for prices.
Yes, that too sounds like something out of a Bond film, but I assure you that it’s all very proper. If nations were engaged in a free-for-all, supply could very well outstrip demand, which would negatively impact their economies and create problems for these nation’s balance sheets. There are 13 members in OPEC.
Even at current crude prices, the breakeven level for nations like Libya, Venezuela, and other OPEC members is still well above today’s price of oil.
Why does OPEC matter? Because OPEC nations produce 40% of global oil. As of 2018, it also controlled nearly 80% of the known international reserves in crude.
So, they have market power – the ability to control oil prices, the ability to set quotas, and the ability to manage how much crude hits the global markets at any given time.
However, OPEC’s power has abated due to the United States rise over the last decade. The U.S. revolution in fracking oil and gas allowed the U.S. to become a net exporter of crude oil for the first time in decades. But OPEC has a lot of power over other big economies like Germany, China, India, and Japan.
Who Really Controls Oil Prices
OPEC had cut production last year at the height of the COVID shutdown. You’ll recall that here in the U.S., WTI crude prices (which are the U.S. benchmark compared to Brent, which is the global benchmark) went negative for a period. Last year, OPEC slashed 9.7 million barrels per day to bring the global market back into equilibrium.
It had eased back slightly by January, but it still was keeping about 7.2 million barrels off the market.
With the global economy reopening, OPEC has announced plans to boost crude production in July. That decision will add about 2.1 million barrels to the market over the second quarter.
The group will meet again on July 1. That matters because we’ll learn the fate of Iran’s efforts to bring crude oil back onto the international market. Iran is currently talking to six other nations about reviving its 2015 nuclear deal. If that deal comes back online, we will see more oil move onto the markets in the months ahead.
The key question moving forward, however, is just how much will come online and if Iran will cooperate about its nuclear energy ambitions.
My gut says that it isn’t going to be a smooth ride over Iran, so I’m banking on higher oil prices over the next month. I think Brent crude will hit $75 by the end of the month, while WTI crude bounces off the $70 level and holds in a $65 to $70 range over the rest of the year.
That figure will be positive for producers with lower-breakeven production costs in the $40 to $50 range in the Permian Basin and the pipeline companies that move crude around the nation. We’ll talk more about MLPs and why I love them right now.