By: Dividend Sensei
On Wednesday May 24th, OPEC agreed to extend last year’s 10% production cut another nine months, to March of 2018. Oil markets were already anticipating this and the price of crude actually declined on the announcement. This means that, what started out as a Saudi Arabian led price war on US shale producers, is now officially ended, with OPEC the big loser. This has important ramifications when it comes to the future price of crude, and more importantly for high-yield income investors, the future of the midstream MLP industry.
OPEC’s Failed Price War
Back in mid 2014 oil prices peacked at $107 and US shale production, courtesy of the fracking revolution, was growing like gang busters. Despite the high price, which allowed Saudia Arabia, the world’s largest oil exporter, to mint money, the Saudi’s were upset that soaring US production was resulting in decreased imports and falling OPEC market share.
Thus it decided to launch a major price war, by drowning US shale production in a flood of cheap crude. Specifically, despite a growing glut of world wide supply, Saudi Arabia forced OPEC to abandon production quotas which resulted in all OPEC members pumping full out (except for Saudi Arabia which maintained 2 million in spare capacity). That in turn caused the worst oil crash in over 50 years, with prices dropping from $107 in June 2014, to a low of $26 in January of 2016.