The Phil Flynn Energy Report
The world is waiting on OPEC+ to hammer out a deal on extending production cuts and basically getting their act together. While the decision to extend cuts for at least three months should be a no-brainer, greed, ego, and shortsightedness seem to control some group members.
The oil market has widely priced in a three-month extension while holding out hope of a more dramatic OPEC+ surprise. Even Vladimir Putin plays it coy by saying that he has no plans to talk to Saudi Arabia ahead of the OPEC+ meeting. Yet, Kremlin spokesman Peskov reportedly says that differences over the future of production cuts are now less severe than in spring 2020. Still, the UAE, Kazakhstan, and others seem to be gumming up the works.
Reuters reports, after an initial round of talks on Sunday, ahead of crucial meetings on Monday and Tuesday, the group is now considering rolling over existing cuts of 7.7 million barrels per day (BPD), or around 8% of the global market, into the first months of 2021. Preliminary consultations on Sunday between the key ministers, including OPEC’s leader Saudi Arabia, and Russia, had not reached a compromise on the rollover duration. Talks are now focusing on extending cuts by three to four months or a gradual increase in output. Ideas of deeper cuts, or a six-month rollover, were much less likely. “There is no consensus as yet,” one source said. If the group fails to extend cuts, the oil market will fall. Already the dispute is weighing on prices.
Yet, good vaccine news may still offer support. Reports that Moderna will submit their Covid19 vaccine for emergency approval today in the US and UK. The oil market will get help from re-opening expectations and the fact that we see continuing strong demand in China. Travel for the Golden Week is reportedly high.
Natural gas is still struggling. In November, Andrew Weissman of EBW Analytics reports that temperatures are expected to be much cooler during the first half of December. While the pattern is likely to be variable, on average, temperatures are likely to be colder than the 10-year norm but warmer than the 30-year average. This should strengthen natural gas cash prices considerably, reducing the downside risk for futures. However, near-term, the forward curve’s ability to rise further will depend on day-to-day degree-day swings and the evolving weather forecast for mid-to-late December. We want to buy winter calls.
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