CH7 - OPEC - II
Hyun-joo briefly explained.
If stocks and bonds are representative of financial assets, then oil and gold are representative of tangible assets.
Until the financial crisis hit, oil prices were close to $150 per barrel. However, following the financial crisis and the slowdown in economic growth, demand decreased, and prices dropped.
What ignited this was the development of shale gas and shale oil in the United States.
The presence of gas and oil in shale rock has been known for a long time. However, due to costs and technological issues, drilling had been impossible.
But with oil prices consistently above $100 per barrel and the development of new technologies, drilling became feasible.
American companies began breaking shale rock and extracting the gas and oil within. The quantities found were immense, leading to what became known as the shale revolution.
"Do you know what the world's top 3 oil types are?"
I learned this in my world economy class.
"Brent crude from the North Sea of Northwest Europe,
Dubai crude from the Middle East, and
West Texas Intermediate (WTI), right?"
By the way, South Korea mainly imports Dubai crude among these.
Hyun-joo nodded with a smile.
"Exactly. As you can see, the U.S. is an oil-producing country. However, despite this, the U.S. could not meet its domestic demand and maintained its position as the largest importer. But everything changed with the shale revolution."
The amount of shale gas and oil produced in the U.S. was enough to potentially change the U.S. from a major oil importer to an oil exporter.
Naturally, oil-producing nations were in chaos.
Oil demand is inelastic. When prices rise, consumption doesn't immediately decrease, and vice versa. This led to a supply-driven pricing structure.
OPEC functioned essentially as an internationally recognized cartel. Whenever they colluded, oil prices fluctuated, leading to the first and second oil shocks.
However, outside this cartel, the U.S. emerged as a new supplier.
The once bright prospect of oil prices exceeding $200 per barrel vanished, and prices continued to plummet.
Demand is fixed anyway.
To raise prices, it was necessary to reduce supply. OPEC member countries hastily held several meetings to cut production, but the results were always unsuccessful.
"The interests of oil-producing countries are too intricately intertwined."
The biggest drawback of shale oil is that it is expensive to produce.
With production costs estimated at around $45 per barrel, if oil prices fall below $50 per barrel, it is said that more than half of the companies will go bankrupt.
"Oil-producing countries on the verge of collapse, like Venezuela, may support production cuts because they could go bankrupt if oil prices fall further. But countries like Saudi Arabia, with a lot of money at stake, are taking a stance to hold on without cuts for the time being. If low oil prices persist, it will be difficult for shale companies as well."
"What do you think the outcome of this meeting will be?"
"Most likely, they will fail to reach an agreement. They are barely maintaining around $60 per barrel, and if it fails this time, it will likely drop below $50. Big players are already betting on that side, with WTI prices dropping more than 8% just this week."
The excessive rise and fall of oil prices are problems in themselves. A decrease in oil prices at this point is having a negative impact on the economy.
"What if an agreement is reached?"
"Prices would skyrocket, and the market would cheer, but… the likelihood is very low."
"Still, a deal might be reached this time."
Hyun-joo gave me a puzzled look at my statement.
"Why do you think that?"
I blurted out without thinking.
I was being vague.
"I, I just think it would be nice if it happens."
Hyun-joo smiled bitterly.
"It would be nice indeed, but hope and prediction are different things."
As our conversation ended, Hyun-joo's phone rang again.
Buzz!
After checking the message, Hyunjoo stood up from her seat.
"I'm all ready. I have to go now to work. See you next time. Jin-hoo, take care of him."
"Yes, don't worry."
Taekgyu clicked his tongue.
"I'm the one taking care of Jin-hoo. You don't even know."
* * * *
We got back into the car to head home.
While Taekgyu was driving, I kept thinking about what I saw earlier.
What does the OPEC production cut agreement mean?
"… "
Naturally, it means that OPEC is agreeing to cut production, right?
If the agreement goes through, oil prices will skyrocket. Even without Hyunjoo's words, it's common sense.
At that moment, a thought popped into my head.
What if I buy oil in advance?
If this is really foresight and what I saw is correct, then just by purchasing oil in advance, I could make a lot of money, couldn't I?
Oh! I think I just had a brilliant idea.
I calmly considered the idea.
I predicted the artillery explosion and the Mountain Hill bankruptcy. Following the law of induction, this OPEC cut should also be correct. (Let's think about the weaknesses of induction later.)
The problem is the investment capital.
After giving my mother the down payment for the house and 100 million won, I currently have 250 million won left in my account and 740 million won in Taekgyu's account.
Should I invest in all of this?
As I was thinking this, Taekgyu asked me.
"Did you see something when you were talking with noona earlier?"
"Huh?"
"You did see something, right? What was it? What did you see?"
"… "
Kids have a keen sense of pointless things.
Wait. Come to think of it, I only have about 1 billion won with me, but he has more than ten times that amount.
I asked Taekgyu while looking at him, "Do you happen to be thinking of buying oil?"
Taekgyu looked bewildered. "Oil? Buy oil? We're fully stocked on gasoline right now."
"No, I'm not talking about filling up your car; it's something else…"
I explained what I had seen and the idea that just came to mind.
Taekgyu was taken aback after hearing me out. "So you're saying you predicted the OPEC production cut agreement, and if it goes through, oil prices will rise, so we should buy it in advance?"
"Exactly."
Thankfully, he understood it easily.
"But where would we keep the oil after buying it? Stack barrels at home?"
"… "
Looks like he didn't fully grasp the idea.
* * * *
We arrived at Taekgyu's one-room apartment in Yeoksam-dong.
As soon as we entered the house, Taekgyu cleared the dishes on the desk and turned on the computer. He opened a browser and immediately searched for US Oil WTI price.
The United States struggles to handle its domestic oil production alone. Even if trading takes place, the oil is not exported overseas.
Despite that, due to the developed nature of the financial market in the United States, it was playing a role in determining international oil prices.
As Hyunjoo noona mentioned, WTI price barely held the $60 per barrel mark. To be precise, it was $60.48.
"It has dropped significantly."
Crude oil is not only used for filling up cars but is also utilized across various industries. Therefore, a rise in oil prices significantly impacts producer prices.
When my father operated the factory, he struggled due to oil prices exceeding $100 per barrel. But now, after a few years, it has hit this rock bottom.
Shale oil is truly amazing.
Taekgyu logged into his Golden Gate account. Even after sending me 500 million, he still had a balance of $11,932,000. Around $673,000 which is my share.
"WTI? Where can we buy that?"
"At the New York Mercantile Exchange (NYMEX)."
Taekgyu seemed excited about something.
"How much are you thinking of buying?"
Since we can't predict the outcome, let's start with about half a bet.
"$300,000."
"Then let's buy mine together."
"How much are you going to buy?"
"About $10 million."
"Dollars?"
"Yes, dollars."
I was speechless and said, "How can you call that an appropriate amount? Are you out of your mind?"
"Then $5 million?"
Did he lose control suddenly because of the newfound money?
"This is not a sure thing, buddy."
"You're confident? Then it should work out fine."
"And if it doesn't?"
"Okay. $3 million. Can't go any lower."
"…Do as you please."
The market was predicting the failure of the production cutback meeting.
As the market had already factored in this prediction, the oil prices had dropped significantly. Even if the cutback fails, the further decline might not be substantial.
If we're wrong, we can just sell at a little loss.
* * * *
I went into Taek-gyu's account and bought WTI.
It sounds unbelievable, $3.3 million, a sum unimaginable for an ordinary person. With trembling hands, I clicked the buy button.
"What should we do now?"
"We have to wait for the OPEC meeting to end."
TL/n :-
Common Financial Knowledge
Supply > Demand = Price falls
Supply < Demand = Price increases
Example:
Let's assume you are selling tomatoes at a market price of ₹20/kg and you currently have more than 100 kg of tomatoes at your farm.
Now, due to bad weather conditions, tomato production is cut down by half. The demand for tomatoes remains constant, but the reduced supply due to bad weather conditions causes demand to exceed supply. Consequently, the market price starts to rise.
Do you remember about a year ago when the price of tomatoes shot up to more than ₹250/kg?
---------------------------------------
The "Shale Revolution" refers to the combination of hydraulic fracturing and horizontal drilling that enabled the United States to significantly increase its production of oil and natural gas, particularly from tight oil formations, which now account for 36% of total U.S. crude oil production. This new production capacity has reduced the United States' dependence on oil imports from overseas and continues to provide an important economic boost as the country recovers from the 2008 recession.
Oil and gas constituted 1.6% of the United States' GDP in 2011 and is growing.
The United States is now a leading oil and gas producer, as global supply has diversified away from the Middle East. Reduced imports of hydrocarbons improve the U.S. trade balance and minimize direct financial support for oil exporting regimes which may act counter to U.S. interests. Through the increase of domestic oil production, net petroleum imports have dropped to 27% of total U.S. consumption, the lowest figure since 1985. Politicians hope that the shale boom could foster an era of U.S. "energy independence," whereby domestic production satisfies consumption. However, as oil is priced in a global market, as long as the United States remains connected to global markets, it will always be vulnerable to price shocks. Even if the United States continues to cut its imports of petroleum to nearly zero, a supply interruption in the Middle East would force global oil prices upward, hurting U.S. consumers. While this "one great pool" logic is true for oil, the market for natural gas is more regionally disjointed and therefore presents a unique set of challenges.
---------------------------------------
U.S. is the largest oil producing country in the world (13,295,000 barrels/day)
The United States is a net crude oil importer, meaning it imports more crude oil than it exports. In 2020, the U.S. imported nearly 5.88 million barrels per day and exported about 3.18 million barrels per day.
The main sources of U.S. oil imports are Canada (52%), Mexico (11%), OPEC nations (11%), and Saudi Arabia (7%)
---------------------------------------
The "first oil shock" and "second oil shock" refer to significant disruptions in the global oil market that occurred in the 20th century:
First Oil Shock (1973-1974):
Cause: This shock was triggered primarily by the Arab oil embargo of 1973. The members of the Organization of Arab Petroleum Exporting Countries (OAPEC) imposed an embargo on oil exports to countries that supported Israel during the Yom Kippur War (October 1973).
Impact: The sudden reduction in oil supply led to a sharp increase in oil prices. The price of oil quadrupled from around $3 per barrel to nearly $12 per barrel. This had a profound impact on the global economy, leading to inflation and economic recessions in many countries that were heavily reliant on oil imports.
Second Oil Shock (1979-1980):
Cause: The second oil shock was primarily driven by the Iranian Revolution of 1979. Political instability in Iran disrupted oil production and exports from the country.
Impact: Oil prices surged again, doubling from around $15 per barrel to over $30 per barrel. This spike in oil prices exacerbated inflationary pressures and economic downturns in many countries, particularly in the West.
Both oil shocks highlighted the vulnerability of economies heavily dependent on oil imports and underscored the geopolitical influence of oil-producing countries on global markets. These events also prompted many countries to pursue energy diversification strategies and increased efforts to conserve energy resources.
---------------------------------------