Crude comeback

November 15, 2016 08:36 AM

Crude oil prices, after plunging to a three-month low, snapped back on reports of a new diplomatic push by OPEC to finalize a deal to cut production. The report by Bloomberg said that Qatar, Algeria and Venezuela is leading the push to overcome the divide between Saudi Arabia, Iraq and Iran.

Apparently Iraq and Iran are considering bending a bit and it may be because oil prices have fallen almost $10.00 a barrel since they failed to finalize an agreement at the last strategic meeting.Saudi Arabia has acknowledged that they should take and will take the biggest chunk of cuts but want Iraq and Iran to follow suit.

Bloomberg News reports that, “Iraq needs to cut output and Iran has to freeze production around current levels which neither country has agreed to do." Bloomberg reported that, "Iran is considering a proposal to freeze its oil production near the level the country says it pumps -- nearly 4 million barrels a day -- rather than OPEC’s estimate of about 3.7 million, the delegate said. Iraq is mulling a cut, but only from the official level of about 4.8 million barrels a day, not the 4.6 million barrels a day OPEC says it pumps, the person said. Iraq has sought an exemption from joining any production. All members must agree to collective action, pledge to share the burden of cuts equitably, and do so in a way that is transparent and has credibility with the market.’

It is clear by market action how important a cut will be to the crude oil market. We saw after the September meeting in Algiers, oil soared from the mid $42 a barrel handle low to a high just under $52 in the front month. When it looked as if the deal would fall apart the market gave it all back. Now if we get a deal we will head back toward $50 and longer term back to $60. The market seems to suggest that even with modest restraint on production we can quickly go into a supply deficit and sustain higher prices. 

And don’t think that shale will make up the difference. Even with the additions of new rigs and a slight uptick in production Reuters News reports that U.S. shale oil production will fallen December to its lowest level since April, 2014 at 4.5 million barrels per day (bpd). 

So, if OPEC follows through then we may have hit a low! Of course, there is more time and more headlines before they meet at the end of the month. I am optimistic that they can get a deal done because they may start to understand that they may make more money by pumping less.

Natural gas also looks as if it is bottoming as well. Falling output and expectations of electricity power demand in the south and cold weather demand along parts of the East Coast will put us near a bottom. The outlook for this weather and next year remains bullish as falling production and pipe line capacity restraints could send prices sharply higher at some point. Look to use weakness to buy.

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.