How does oil rally 6% when nothing is finalized? These guys could easily come back in November with Iran saying screw you guys we’re pumping more.
Yes, that’s possible but the probability of a supply cut has increased.
This feels pretty likely. Nobody WANTS to cut their own production, but they want a coordinated cut. Unfortunately for them, lots of people need to keep pumping for the cash (Iran, Venezuela). Also lets look back at the last 2 years. How many times has OPEC tried to get people to agree to cut production and how many times have they succeeded? Answer to question two is zero.
Short covering. Price is already retracing. $47 is not a stable price (as determined by the auction behavior). Probably headed back down to $45 in the near term.
It rallies because it’s an indicator. These major international agreements aren’t done in one afternoon. First the players need to come to an understanding. Then they need to agree to a roadmap. After haggling over a roadmap they’ll start finalizing details etc. Process takes months.
The times when Saudi has even talked about cutting its production is zero, too. The quotes from Al-Naimi over that time period – when that man spoke, oil went down b/c he wasn’t backing down. Smaller, higher-cost OPEC members were the ones that talked about needs to cut…not really Saudi, until now.
Regarding the surprise on a 5% move, A $2/bbl increase in oil prices based on an OPEC production cut is nothing. For perspective, oil dropped >$20/bbl in a month when OPEC announced they weren’t going to balance the market anymore after Thanksgiving 2014. If the market truly bought that this cut were set in stone and OPEC has truly changed its stance, oil would be up a lot more today.
If OPEC does actually move its production to 32.5 mmbpd (demand levels held constant), oil should be in the $50-$60/bbl range in 2017
I think there will be bumps in the road through all of this for sure. Cheating on agreements is likely but an actual cut is a pretty big deal in this supply-induced bear market. The proposed production cut isn’t huge and not enough to balance the market but it is pretty symbolic. Sentiment can really drive the oil market.
i dont see how russia can agree to a production cut, putin is broke
To Tommy: don’t feel like quoting the whole post, but all good points. The thing is, who in OPEC is willing to cut? Many of them, cutting production isn’t economically feasible. Iran wants to ramp the F up, Venezuela is, well they’re F’d either way but they can’t cut production. Saudi has shown their willingness to defend market share by cutting prices to Asia markets this year. US production is proving to be rather resilient in the face of these low prices. My gut instinct is this feels like a dead cat bounce, or head fake, or whatever metaphor you want to use. If OPEC actually says how they plan to remove 700k b/d from the market, then I’ll believe it. Until then…
Excellent.
Im gonna give the portfolio a shake down and see where I want to lighten up a little.
Could they be doing a production ceiling vs cut? That way nobody has to give anything up.
Ok, I stand corrected. Looks like the market is taking OPEC seriously after all.