OPEC Has Just Put A Floor Under Oil Prices
Inside Opportunities with Martin Tillier - Oil Price.com
September 30, 2016
The stunning news of a tentative OPEC agreement out of Algiers caught just about every trader flat-footed.
Speculative short positions in oil had been growing, and oil markets and oil stocks rallied spectacularly on the news to rip the guts out of any trader who’d bet on nothing happening at this meeting, as had been the case the four previous times.
Organization of Petroleum Producing
Countries (OPEC) Secretary General
Mohammad Sanusi Barkindo (R)
There’s a lot to unpack here, but first things first: I wouldn’t be fading this move – OPEC is back.
We haven’t been short names in the energy space, quite the opposite – but we had been looking for a retreat in some U.S. shale names for the opportunity to add to core positions. That opportunity is gone. The OPEC agreement, despite its many, many holes, puts a floor under oil I don’t think will ever again be breached.
Here’s a mistake I will never make again, ever since my first days on the floor trading on the NYMEX: Never doubt the words of the Saudis. Every time in my long career that the Saudi oil minister signaled a price shift, whether up or down, they’ve made it happen. I misread a Saudi signal one time, however, in the fall of 2014, when they indicated their desire to pump freely and fight for market share. I lost $15 dollars a barrel in crude price before I remembered what I never should have forgotten and got to the other side of the trade – and I won’t be fooled ever again.
But first, let’s look. The agreement calls for a modest 750K barrel a day reduction in OPEC output, and does not seem to limit Iran, nor does it mention Russian cooperation. On the face of it, Saudi Arabia could easily cut ¾ million b/d and be done with it, but that wouldn’t make any sense for the Saudis – I can’t believe they’d agree to be entirely alone.
But they might agree to be mostly alone: Their hemorrhage of reserve assets, at an average pace of more than $10b a month since late 2014, has clearly caused a moderate panic:
Yes, the Saudis had the strategy of bleeding the U.S. shale industry white, forcing U.S. producers to go bankrupt and stop producing, and putting the global swing barrel oil threat and responsibility back in the hands of the Saudis.
You’d have to say now that the U.S. shale industry faced this rifle barrel without flinching. With this OPEC announcement, they can declare at least a pyrrhic victory. Through stringent cash control, quick refinancing and secondaries, efficiency gains and concentration on core drilling, the strongest shale producers have continued to survive, if not thrive. It is Saudis that blinked.
The U.S. players that will benefit the most, and are rallying the most strongly off of this news are those with ready acreage that breaks even above $50 a barrel – companies that haven’t taken the foot off the gas pedal much during this downturn, like Pioneer Natural Resources (PXD), Parsley Energy (PE) and Continental Resources (CLR). I won’t chase them here, as they’ve all caught short sellers in the headlights that are scrambling to cover and magnifying their pop, but I will target them as the dust clears. I believe the details of this OPEC agreement, yet to be worked out in November, should give the markets enough pause to lose some interest in these names during October.
And looking at the very few details of the agreement that have been announced, there remain plenty of questions: Who else besides the Saudis will participate? How will the cartel balance the coming production increases from Libya and Iraq? After a long history of disregarding quotas, who’s to believe they can be enforced now? Can the Saudis and Iranians really agree upon anything, considering their overall confrontational stance and real time confrontations in Syria and Yemen?
I say forget all that – I learned something in 1983, my first year on the floor, that I forgot for a moment in 2014. I won’t make the same mistake again.
Mistrust Within OPEC Makes For A Sour Deal
Executive Report with ISA Intel - OilPrice.com
Yesterday, after a lot of talk and much speculation the leaders of OPEC emerged from an unofficial meeting at the Algiers energy summit and shocked a lot of people, not least of all your humble correspondent, by announcing a deal. The oil markets reacted as you might expect when conventional wisdom is defied, i.e. sharply. WTI jumped up around 7 percent immediately the news came out. Overnight, though, futures came off the highs and, in volatile markets yesterday, there was little follow through to higher levels. WTI eventually settled less than a dollar higher than yesterday, and is still in a long term downward trend. Traders, it seems, were asking themselves the questions, is this a real deal, and if so what effect will it have?
Call me a cynic, but when OPEC’s Secretary General, Mohammad Barkindo came out with a big smile and his thumbs up it reminded me too much of Howard Macmillan returning from a meeting with Hitler and declaring “Peace in our time!”…just before the Nazis invaded Poland. Barkindo announced that OPEC had reached a great deal, but then as details emerged some began to question that. They have, in principle, come to an agreement to cut overall production by cartel members from 33.2 million barrels a day in August to 32.5 million after November. That represents a roughly 2 percent cut from all time record levels that have produced a huge global glut of crude.
That doesn’t sound like too big a deal, but those bullish on oil from here will no doubt point out that people like me thought there was little chance of any deal, so this at least proves that OPEC still has teeth. Well…not really. You see, what was missing from this agreement was the most important part, who will actually cut and by how much. Of course everybody agreed to a cut in principle, probably all believing that they could get away with forcing others to actually reduce production. The hard part of the agreement will not even get talked about until the scheduled OPEC meeting on November 30th, yet the first shot in that debate has already been fired. Yesterday Iraq started to question the production levels off of which the cuts were based. Given that getting Iran and Saudi Arabia to agree was always going to be the stumbling block here that is not a good sign.
Let us for a moment, though, assume that those two nations, who are currently fighting proxy wars in Yemen and Syria, do reach an agreement, and peace and goodwill breaks out all over the Middle East. That would still not be the end of the story. Back in February, then Saudi Oil Minister, Ali Al-Naimi declared that cuts wouldn’t work, as history showed that nobody stuck to them. That comment may have contributed to Al-Naimi losing his job, but if so that wouldn’t make him the first person ever punished for speaking an uncomfortable, inconvenient truth. The lingering distrust between Iran and Saudi Arabia makes adherence to any agreement fairly unlikely.
The answer to the question of deal or no deal, then, seems to be “no deal”. What Barkindo announced with such joy on Wednesday is essentially an agreement to talk about an agreement. Without basic details, and with mistrust already surfacing two months before the scheduled meeting, the Secretary General’s optimism look, to say the least, somewhat premature.