Here we go again? New speculation that major oil exporting countries will agree on a deal to curb production is once again giving oil traders a reason to buy. But is this latest bout of bullish optimism justified or just a rumor that’s destined to fade?
The Production Freeze: Groundhog Day for Oil Markets?
The recurring talk of a move by OPEC to reduce oil exports might remind fans of Bill Murray’s role in the 1993 film Groundhog Day, in which a disgruntled TV weatherman finds himself stuck in Punxsutawney, Pa., covering the annual ritual of learning whether the resident groundhog sees his shadow on Feb. 2. Murray’s character finds himself trapped in a surreal loop of reliving the day over and over until he finally overcomes his curmudgeonly cynicism and becomes a stand-up guy.
Oil markets have been living a Groundhog Day of their own during the past two years, repeatedly rallying on hopes that Saudi Arabia and its OPEC colleagues will finally freeze their oil production, helping to tame the glut of output that caused prices to fall from $100 per barrel in the summer of 2014 to about $45 today. And yet, every time market expectations for some sort of freeze agreement rise, OPEC disappoints them and prices invariably tumble again.
Is this time different? Maybe, depending on whom you ask.
Two Schools of Thought
Stephen Schork, editor of an energy investing newsletter, The Schork Report, and an astute observer of oil markets, thinks the latest talk of OPEC and Russia reaching a deal to jointly limit their oil production is going nowhere. “This is desperation on the part of Wall Street,” he says, referring to bullish traders looking for anything that might finally give low oil prices a lift. “This is November 2014 all over again,” a nod to the much anticipated OPEC meeting that ended with the cartel announcing it wouldn’t take any action to halt the slide in oil prices that was just gathering pace at the time.
As he sees it, the sticking point for any oil output deal involving OPEC and Russia continues to be Iran, which has been ramping up its output, now that Western sanctions on its oil industry have been lifted. Iran and Saudi Arabia (OPEC’s de facto leader) are historical enemies. And since the lifting of sanctions on Iran, the two countries have been competing for a bigger share of the global oil market, sometimes by cutting the prices they charge their customers. Any meaningful attempt to limit OPEC’s oil production would require these two rivals to put aside differences and cooperate. Schork sees that outcome as laughably implausible.
Maybe the answer depends on how desperate OPEC gets and how low oil prices go. Jason Schenker, president of Prestige Economics in Austin, Texas, watches the cartel closely for subtle signs of shifting policies that might ultimately move oil markets. He thinks he picked up on one in June’s OPEC meeting, noting the conciliatory tone of Saudi Arabia’s new oil minister, which he thinks could signal a new willingness on Riyadh’s part to work with its OPEC partners.
Schenker often refers to OPEC as the “central bank of oil,” and he suspects that the group is starting to mimic the tactics of the U.S. Federal Reserve, which seeks to telegraph its policy moves to financial markets in advance to minimize the disruptions they might cause. In this case, OPEC might be signaling its willingness to act on cutting output, if the price of oil falls too low. Schenker thinks that threshold is $40 per barrel: If crude prices fall back into the $30s, the odds of OPEC cooperation go up. If the price stays above $40, the group will probably stand pat.
We see merit in both these positions. There is no denying the geopolitical tensions that make any concerted OPEC effort so difficult to implement. But there can also be little doubt that no one in OPEC can bear low oil prices indefinitely. Perhaps another drop below $40 per barrel would reach the pain point at which historical rivals finally decide to put aside differences and work together.
So, while oil prices might surge on every hint of an OPEC production deal, be skeptical. But if the market tumbles again, don’t rule out a deal entirely. After all, even Bill Murray did finally escape from Groundhog Day.
Wood: The Nonfossil Fuel
We write a lot about oil markets here at Kiplinger because they have such a big impact on the global economy and investors everywhere. But we also want to keep abreast of other energy trends. One of the energy sources that often gets overlooked is a very old one: Wood.
The Department of Energy estimates that 2.5 million households in the U.S. rely on wood as their primary heating fuel, a number that has actually climbed substantially in recent years. Especially in the Northeast, a growing number of folks fire up woodstoves and other wood-fueled heaters when the mercury drops.
Recently, the Environmental Protection Agency implemented new regulations governing woodstoves and heaters aimed at making them more efficient and less polluting. For most woodstoves, the regulations don’t take effect until 2020, but certain low-efficiency models can no longer be sold because of the rules. The Alliance for Green Heat, which offers resources for consumers, says that stoves sold from 2020 on might go up in price by several hundred dollars, depending on the manufacturer. The group also warns that even among modern, “EPA-certified” stoves that meet current emissions rules, some manufacturers don’t advertise reliable, independently verified efficiency ratings. So buyer beware. (The Alliance recently highlighted some brands that do use dependable efficiency ratings in their claims.)
To do some field testing of my own, I recently purchased an EPA-certified woodstove for my finished basement. Early test burns seem promising, and I hope to report this winter on how effectively a modern stove can cope with the moderate cold that the Washington area typically experiences. My big question: Can it sometimes stand in for my natural-gas-fired furnace, and maybe save a little money in the process? Meanwhile, any readers who are seasoned wood burners and would like to share tips for how to get the best use out of a stove are invited to e-mail me. I’ll compile an anonymous rundown of those recommendations and share them.