The main and most important short term oil price driver continues to be the outcome of tomorrow’s OPEC meeting in Vienna. The market prognosticators remain divided but based on the outcome of yesterday’s Russia, Mexico, Venezuela and Saudi Arabia meeting the odds of a deal moved down a few notches. Neither Russia nor Mexico showed a willingness to cut their production in support of an OPEC cut (if in fact OPEC cuts production). Rather the outcome of this meeting was to watch the market and meet again in February…a non-event.
Where oil prices head from current levels is strictly in the hands of OPEC and what they decide to do tomorrow. Yesterday the WSJ indicated that the group was moving closer toward a cut or what I would call an indirect cut. The WSJ reported that the group was leaning toward a deal that results in OPEC keeping their quota at the current level of 30 million barrels per day and all members agree to comply with that quota. The WSJ estimates that if all member countries complied with the current quota it would result in a cut of about 300,000 bpd.
If this is what comes out of the meeting, I do not think the market will act very favorably to the outcome. First, the cut is too small to have any significant impact on the current supply and demand balances. Second, in the over 50 years of OPEC’s existence I do not recall any period of time when OPEC achieved a compliance level of 100 percent. This time will not be any different and there will be cheating and overproducing and thus the cut would be even smaller than the estimated 300,000 bpd.
The aforementioned potential rollover deal would in essence be a no deal in my view as well as how the majority of the market will interpret the outcome. Prices would likely decline further and the main question will arise… why does OPEC even exist and are they relevant insofar as impacting oil prices? Simply put if OPEC wants to defend prices they will have to agree to a much stronger deal and one that actually cuts their current quota. To get prices moving higher a 1 million barrel per day cut is what is needed. Short of that the market is likely to yawn and sell at the outcome.