OPEC's last stand

November 30, 2016 08:13 AM
Daily Energy Market Analysis

Stand up or go home. The oil market is giddy as we go into the final stretch in what may be the most important OPEC meeting in recent history. The Cartel today will not only decide on a deal to restrain production, but there also may be a vote on the cartel's future relevance. It is "do or die" for the cartel because if it fails to act, it may fall onto the dust heap of history. The cartel has a lot more to lose other than money if this deal fails. 

Not only will they lose credibility, but this is it's last chance to act ahead of a Trump Presidency that has vowed to retaliate against oil producers that don’t have our best interest at heart. With a market that is moving toward balance, the cartel had better act because if they try to do this next year they may face the wrath of Donald Trump.   

Early on, the ministers are saying all the right things. Saudi Oil minister Khalid al-Falih is saying God-willing, they will have a deal. The Iraqi oil minister says that they will also join into a production cut. Now it will be up to Iran to make or break this deal. While Iran’s oil minister Bijan Zanganeh is saying that Iran will not cut production, it is suggesting that perhaps there may a roadmap to a compromise. The Saudi Oil Minister al-Falih is also hopeful that non-OPEC producers will cut production by 600,000 barrels a day. 

That, along with an OPEC cut, could mean a total cut well-over a million barrels a day. The thought is that OPEC will go back to the deal made in Algiers and cut production to 32.5 million barrels a day from its October level of 33.6 million barrels a day now. So, if you take a 1.1 million-barrel-a-day cut and add another 600,000 barrels a day, we are starting to get to a level that with increasing demand should start to drawdown global inventories.

Don’t expect that the U.S. shale producer can replace that anytime soon as they are struggling to keep oil production where it is. Most drillers are not drilling for profits but to protect leases or keep cash flow to pay off loans, but that does not signal a major ramp up in production.

So, if OPEC does agree to these terms and the show signs of compliance, we should see oil head back toward $60 a barrel. We may see some "buy the rumor, sell the fact" activity, but if this deal is done, the fundamentals have changed. We will see a global supply deficit for the first time since the financial crisis began and that is a significant game changer for this market. If they screw this up, it will be woe to OPEC and we will see oil fall hard again and retest the high $30 handle. 

 The drama surrounding OPEC may overshadow oil inventories, which based on the American Petroleum Institute (API) numbers, were sending mixed messages. The headline number showed that crude supply fell by 717,000 barrel, but we saw a 2.38 million barrel build in Cushing, Okla., according to Bloomberg. We also saw a large 3.36  million barrel jump in gasoline supply and a 2.24 million barrel increase in distillates.

Natural gas is taking a break after a big weather related run. We should see supply fall by 65 bcf’s this week and that may get us to resume the rally after what should be a break. Weather forecasts for December are favoring the bulls and we may test the perception that our supply is overflowing.

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.