Bad News About Oil Prices

I have very bad news about oil prices. In the foreseeable future, their most likely trajectory is… volatile. That is right, bullish and bearish oil price narratives will be proven to be unsatisfactory and overly simplistic. The best bet would be to invest in volatility plays.
What explains this heightened volatility in oil prices? The short answer is the death of OPEC. The U. S. geopolitical deleveraging out of the Middle East has created a disequilibrium, with Iran and Saudi Arabia engaged in a competition for regional hegemony. This competition is unlike anything investors have seen in the Middle East because it takes place in the context of global multipolarity. The U. S. is no longer willing to expend increasingly scarce resources to micromanage the Middle East and no other power is going to step in to fill the vacuum. OPEC cannot survive in this environment because a cartel cannot be maintained when its members are openly at war with each other.
How important is the death of OPEC for oil prices? My colleague Robert Ryan, Chief Strategist of BCA’s Commodity & Energy Strategy, and I think that it is transformative. In our joint report – titled End Of An Era For Oil And The Middle East – we argue that the salient feature of the global oil market for the past 85 years has been coordinated control of production. Oil markets will see truly free-market pricing for the first time since 1930, when amidst a chaotic free-for-all spawned by the boom in oil the Texas Railroad Commission began pro-rating production in the state to control prices.

This post was published at FinancialSense on 04/24/2015.