OPEC is again taking it down to the wire after marathon talks failed to mend differences between Iran and Saudi Arabia. The Saudis were taking a tougher stand on Friday, suggesting that they are ready to walk away from the deal and seemed to put the deal in jeopardy. All along it has been the Saudis that have worked to secure a production deal after walking away from an agreement in Doha last April. Yet even though the Russians are not attending the meetings and the fact that the Saudis are suggesting they don’t need a cut, there is still hope that a production cut deal can be salvaged at tomorrow’s OPEC meeting.
The Financial Times (FT) is suggesting that there were, “signs of greater flexibility between the main players”. The FT suggests that Iran would be open to freezing production at just under 4 million barrel a day. That would be a major concession from Iran who recently has played hardball saying it should be exempt from production cuts even though privately saying they might have some wiggle room. The FT says that Saudi Arabia thinks that Iran should hold production to 3.7 million barrels but said it may be open to 3.8 million barrels a day or even a bit higher to give them some wiggle room to get the deal done.
While some believe that if OPEC fails to cut production, oil could crash into the $20.00 area but I believe that is unlikely. Even without a cut the market is very close to being balanced and we would most likely find strong support in the high $30.00 area say like $39 to $38 dollars a barrel. The Saudis have a point, the market forces are doing a lot of its job for them yet if the cartel misses this opportunity to close the deal, the organization will destroy any credibility it has with the market. In other words, this is a lot more critical for the cartel than just the price of oil over the next few months. OPEC has a lot on the line.
This brings us back to non-OPEC player Russia. Russia was ready to freeze output in April and they are willing to freeze output today. The problem is that Russia is producing more oil than they were in April when they were producing 10.9 million barrels of oil a day and now they are at 11.205 million barrels a day. Still Russian Energy Minister Aleksandr Novak said that a potential freeze in oil output will mean a cut in planned production for 2017 by up to 300,000 barrels per day. So in other words, in his mind, by freezing at 11.205 he still would be cutting based on his increased production assumptions for next year. The Saudis don’t seem to like that math and that is why they should have taken what they were offering in April at Doha.
The challenges are being even more interesting as are the growing myths of “Peak Oil Demand” and the myth that shale oil will see a massive surge in output soon. The truth is that both of those problems are done the road. This is OPEC’s moment! They will take it down to the wire and the outcome will determine if the cartel is relevant or not.
Tonight we will get a look at supply after the American Petroleum Institute releases its data. We’ll see a refinery run increase cut into crude supply and expect crude oil down 3.0 mb, gas up 1.0 mb, distillates down 2.0 mb, Cushing down 400k, runs up 1.0.
Natural gas may pull back a bit after its big run but we expect the pull back will be a short one. Seasonal temperatures and a colder outlook ahead will mean that a pull back should be bought.
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