A Dying OPEC Country Could Spur a Massive Oil Rally

In 2017, the global supply of oil declined by 400,000 barrels per day. That spurred a rally in oil prices from $42 per barrel to $66 per barrel. That’s a 57% increase in the oil price.

The Organization of the Petroleum Exporting Countries (OPEC) will attribute that to its production cuts. But that’s a lie … the truth is much darker.

Oil Money

You see, if Venezuela were healthy today, we’d be swimming in oil. But the country’s political trouble killed its oil industry. That could mean a shortage of oil later this year … and much higher prices.

In the 1990s, Venezuela wasn’t exactly a model country. Its government treated its oil industry like a golden goose. In 1998, the country produced nearly 3.5 million barrels of oil per day. The cash rolled in.

However, there were a lot of “holes in the bucket.” Oil money enriched the powerful, while two-thirds of the citizens lived in poverty.

The political backlash elected Hugo Chavez, a socialist. He immediately put his cronies into top jobs in the oil industry. They took the bulk of the country’s oil revenue and doled it out to the population. The result was that the golden goose starved to death.

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Venezuela’s Collapsing Oil Industry

The oil industry is a capital-intensive business. You need to put a lot of money in the ground to get the oil out. With a conventional well, the metrics are often 10-o-1 returns on the investment … over time.

So, a million dollars invested today can result in $10 million returned … over time.

Chavez and his cronies failed to understand the economics, and Venezuela’s oil industry collapsed. You can see what I mean from the chart below:

Oil Money

The chart above shows the destruction of some world-class oil fields. The part of the chart that concerns me most is the rapid decline from 2015 to today. That’s a 30% collapse, and it shows no sign of slowing.

Remember, a 400,000 barrel per day decline drove a 50% increase in the oil price. Venezuela’s oil production fell an average 30,000 barrels per month in 2017. It fell by 160,000 barrels in December 2017 alone.

That’s a critical situation today, because demand is rising. That means the deficit could grow from both directions … more demand and less supply. According to the International Energy Agency (IEA), demand for crude will rise to 99.3 million barrels per day, worldwide. That’s up 1.5 million barrels per day from 2017.

It’s time to take another look at oil producers before the rest of the market figures this out. One easy way to do that is through the Energy Select Sector SPDR ETF (NYSE: XLE).

Its top 10 holdings make up 72% of its assets. The bulk of that is in Exxon Mobil (22.6%), Chevron (16.7%) and giant service company Schlumberger (7.2%).

That’s a good place to start for exposure to the oil industry.

Good investing,

Matt Badiali

Editor, Real Wealth Strategist

  • scruffyleon

    I think the writer of this article intentionally left out part of the picture of the oil story. I wonder why? Stupidity or willful neglect?
    Where is the part of the oil picture about the US becoming a/the major exporter of oil? Is this not a crucial fact in the pricing of oil?

    This type of writing gives me NO confidence in Banyan Hill.

  • jacobum

    Agree. Even before Larry Edelson’s death, Weiss et al seemed to have changed from supplying solid information at a reasonable price to just another online promoter flogging for a sale….and overpriced at that. Just letting subscriptions run out. IMO, The recent/ongoing “Freedom Checks” campaign was the last straw. It is just another example of crass online marketing hype bordering on deception to make a sale. As a result of this type of promotion(s), I lost a lot of respect for Weiss et al. Trust is gone. Don’t intend to renew at EOS.

  • charles moore

    It is Supply and Demand. The fact that the U.S. becomes an exporter does not mean the price of Oil will go down. Since the price of oil is denominated in dollars then one part depends on the strength of the dollar. Another part is Supply and Demand . Another part is the Futures market. Then we have Refining. Can’t sell it for immediate gasoline use. There is a limited number of Refineries as none have been built because of the Left and Environmentalists. So they have to come down for maintenance . It is a fact that 50% of the Refineries are located on the East Coast which is subject to Seasonal Hurricanes. If Refineries are down then they can’t produce gasoline. Oil is also used in other things. It is needed to make Rubber hence Tires and also Plastics to name a few uses.

  • Namorado_TX

    . . . Not mentioned is the growing factor of alternative fuels for transportation.
    Cars can be converted to run on hydrogen or fuel cells, or hybrids, or all-electric.
    How much will demand for oil decline in decades-to-come?
    . . . Even demand for plastics will eventually decline, as people wake up to the
    huge waste of disposable containers in our rivers and oceans, and replace them
    with biodegradable materials! Oil is not a long-term investment.

  • gsmullennix

    It depends on what you mean by long term investment. Those who believe that the oil industry will succumb to replacement sources of energy have not done much in the way of research.

  • scruffyleon

    You just shot yourself in your own foot. HaHaHa
    Of course it is Supply and Demand. But the US has gone from a huge importer of oil to an exporter of oil. That increases the Supply and the effect on oil prices.
    Hurricanes only affect oil prices for a couple of weeks if it hits where there are refineries. US oil reserves can and do handle seasonal hurricanes just fine.

  • scruffyleon

    Oil is only a long term investment.
    The research of locating a potential oil field, then buying or renting, leasing the area, procuring permits,the development of the field, the building of wells and pumps, delivery of the crude oil to refineries, refining the oil, and delivery of the oil, make oil a long term investment.

  • charles moore

    You just shot yourself in the foot. The Hurricane season lasts from June 30 to November the 30th,. Al little more than a few weeks. You only mention Hurricanes and you were wrong there. I also mentioned Refineries which you did not address as well as the Futures market and the Dollar. You don’t know the Supply and Demand and recently the supply is larger. I didn’t mention Shale Drilling but since you are clueless. If the Price of Oil gets above a certain level then it is more Economical for Shale drilling . Even Shale drilling has its Limits since you have to keep drilling deeper and deeper to extract it. So this depends on the drilling and the Acreage. There is no way you can estimate all of these variables in the Future and its effect on the Price of Oil. One has to have a Federal License to export Oil just as one has to have a Federal permit to export Natural Gas or LNG. How many permits have been issued and will be issued in the Future which is another Variable. I suggest that you take a course in Economics 101.

  • scruffyleon

    Oops, there goes the other foot.
    A hurricane lasts only a few weeks in an area. And not all areas have refineries.
    The supply of oil has gotten bigger over the years, not smaller. The demand for oil has increased also.
    I took and passed Economics 101. Seems like you need to go back and re-take it.

  • charles moore

    Apparently you were sleeping during the class. Don’t tell me about Hurricanes. I went through Irma and it wasn’t supposed to hit my City but at the last minute the eye split in half and it went East and hit my City. Then you have Harvey that hit Houston Texas and destroyed Refineries and Matthew the year before. Are you 12 years old ? Hurricanes lasts only a few weeks in an area?I doubt if you have ever been through one. I have given you at least 6 variables that determine the price of Oil and you have not addressed one because you can’t do it, You just keep repeating “Oops” You are clueless and I am not going to answer your Naive attempts and obvious Nonsense. . Grow up!

  • charles moore

    The guy is clueless. He apparently assumes that all locations are able to produce and the fact that the bad locations are also a part of the Investment. Not to mention the variables I mentioned and his failure to address them and the fact that Oil went from over $100 to under $30. What a great investment.

  • scruffyleon

    How stupid you are.
    We are talking about the effects of a hurricane on a refinery.
    In the case of Harvey and the Houston refineries, they were operating within a week and full capacity soon after that.
    You lie about refineries being destroyed. Damaged, yes but not destroyed.

    I have addressed all of the S&D you have talked about. It is not my fault you can’t read. Old age, poor eyesight and dementia must be taking its toll on you.

  • joseph Sullivan

    Well and concisely said.

  • charles moore

    You are not only a Phony but a Liar. You claim you addressed all my points,You did not address my points on
    1. Futures Markets
    2, Strength of the Dollar
    3. Amount of Shale Drilling /.Fracking
    Another person on here mentioned Alternative Fuels which can also have an effect on prices. I did not say the Refineries were destroyed. I said that no new Refineries have been built since the seventies and the existing ones have to come down for maintenance which will drive the price up and some can be damaged where they can’t function at 100%.So what else is left for you. You are an Liar and then you insult people because you c an’t answer the questions. You are a Joke. The Newbie blogs on Yahoo Finance miss you.

  • scruffyleon

    I can see by your answers that you are a confused NWO Globalist. Your mind is warped with the misinformation supplied by the NWO and you have completely bought into it.
    You are not going to change your mind, you are happy to wallow in their feces and drink their kool aid. I am not going to get into a long winded discussion about all the facets of economics that are warped in your brain.