I have been warning about getting overly enthusiastic about Oil Prices for a while now.

And the big reason is the diminishing power of Opec. For decades OPEC, led by Saudi Arabia (SA), has been the global mover and shaker of oil prices. But that day is swiftly passing.

Now, as the U.S. becomes a real heavyweight in the energy business and other superpowers like Russia and China seek their own versions of energy independence, OPEC is having a hard time keeping up.

What’s more, OPEC members no longer follow the orders that SA barks out. Iran and Iraq are desperate to get oil in the market to prop up their flagging economies. They are willing to ship volume over price at this point. Nigeria has similar issues and Venezuela is worse off than them all.

Smart net importers like China look at these oil countries in distress and see opportunity.

Saudi leadership is breaking down.

You still see headlines about Saudi production and their pledge to keep prices high, but it’s evident that they don’t control OPEC, and they don’t control the price of oil any longer.

China built up its strategic reserves when oil was selling for a song. The economy is warming up again, but it has no real need to buy substantial quantities at current prices.

Supply continues to outstrip demand, and Saudi production pledges mean nothing regardless of what the headlines say.

No easy transition

But don’t expect to see a mellow gradual transition as OPEC breaks into pieces. SA is fighting its own version of Iraq in Yemen. It is spending billions a week on a war it can’t win and, at the same time, can’t afford lose from its own perspective.

At this point, the Saudis need oil prices high so they can simply continue to finance the war. But Shia countries like Iran have no interest in helping SA finance the war in Yemen. There are political lines that are being drawn here.

If SA loses the power of oil and its seat at the head of OPEC, the transition will be a bloody mess — literally. And how that vacuum is filled is anyone’s guess.

But even that kind of chaos won’t help boost oil prices. Freed from the shackles of OPEC, the members are more likely to cut deals that will help individually rather than collectively.

And that kind of trading environment would be ideal for big exporters like the U.S. and Russia as well as big importers like China. None have any real interest in seeing SA maintain its current position in OPEC.

For the U.S. it would mean not having to support The Kingdom as it has since Franklin Delano Roosevelt. That would be a game changer regarding the U.S. military presence in the Middle East.

It would also destabilize SA which could mean a whole lot of nasty things — hence my use of the term bloody mess was literal not a nod to British slang.

Oil prices are almost exactly where they were when OPEC announced it was cutting production in November. That’s not a good sign for OPEC. And with the financial cupboards increasingly bare, it’s going to be tough to subsidize all those air conditioners when summer hits the Saudi peninsula.

Stick with the U.S.

The U.S., on the other hand, is sitting in the catbird seat.

It is a great time to be pumping oil out of the shale fields. Plus, cheap oil means U.S. oil doesn’t have to compete with Canadian oil sands since oil sands are very expensive to ship and process, comparatively.

I don’t think it’s time to invest in the drillers yet, but the pipeline companies are good choices — Enterprise Product Partners, Kinder Morgan, Williams Companies.

And oil services firms like Schlumberger, Baker Hughes and National-Oilwell Varco are also good choices here. The focus now isn’t on OPEC, it’s on U.S. output.

— GS Early

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