A kinder, gentler cartel

June 3, 2016 08:11 AM

The Organization of the Petroleum Exporting Countries (OPEC) was close to an agreement but failed to get it done. Still, the cartel did elect a new OPEC president and laid the groundwork for a potential emergency meeting in the future. The change in tone at this OPEC meeting seems to suggest that in the future OPEC may find a way to work together. The Saudi Energy Minister Khalid al-Falih said that Saudi Arabia “will be very gentle in our approach and make sure we don't shock the market in any way.” Those words along with supportive U.S. production data helped bring back crude oil after some initial disappointment that raised hopes of a new quota or production ceiling went off without a hitch.

It was clear that the Saudi’s wanted to mend fences. The failed Doha accord was a diplomatic disaster. The Saudi’s wanted to come back and seem reasonable, which is something that I thought had to happen. Unless Saudi Arabia was ready to go it alone due to the fissure and lack of trust they created by pulling out of the Doha accord.

Bloomberg News reported that I was the “lone voice calling OPEC deal to cap supply almost proved right.” Bloomberg wrote that OPEC came close to setting a production ceiling at its Thursday meeting, something only one of 27 analysts surveyed by Bloomberg predicted. 

They came very close to an agreement and left the door open to an emergency meeting and the group would agree to a cap in the survey conducted last month. There could be an agreement in the near future. Saudi Arabia floated the idea of restoring a production ceiling for the group in Vienna this week, something cash-strapped members have been calling for. The move to build unity was met with resistance from Iran. Iranian Oil Minister Bijan Namdar Zanganeh said he would only support individual country quotas, which would be difficult to agree to in a single meeting. The nation has rejected any cap on output as it restores volumes following the removal of sanctions in January. Its refusal to participate in a production freeze proposed earlier this year prompted Saudi Arabia to block a deal between OPEC and Russia at an April summit in Doha.

I thought there would be an agreement because of what happened in Doha. The Saudis ruffled a lot of feathers and hurt their credibility when they walked away from that agreement. It would have been bad enough if it had just been OPEC producers but this included non-OPEC Russia.

OPEC needs more time to come up with an output cap, outgoing Secretary-General Abdalla El-Badri said after the meeting, adding that it’s hard to find a target when Iranian production is rising and significant Libyan volumes are halted. The Saudis came back and tried. This time it’s the Iranians who are responsible.

Crude oil prices also found support not only from this new fuzzier and warmer cartel but froma the fact that U.S. oil output continues continues to fall hitting the lowest level since September 2014 and falling for 18 consecutive weeks 8,735 million barrels a day. This trend of falling U.S. oil production should continue and we should see more pain in the Baker Hughes rig count this afternoon. We will also look to the jobs report because how that impacts the movement in the dollar and the risk appetite could influence prices. Yet, I still feel that prices are consolidating for another leg higher. We might already be higher if oil did not fear the upcoming Fed meeting and the Brexit cote. We are looking for a breakout run to $60 per barrel maybe higher if some of the Fed and Brexit fears are relived.

Natural gas did well again. The IEA reported that natural gas injected into storage came in at+82 Bcf At 2907 Bcf. With U.S. production peaking and demand at a record this market is a bullish accident waiting to happen. Look to continue to buy calls. We are already starting to move!

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.