Let’s Make a Deal

I attended the OPEC gatherings as an Analyst on behalf of Assist FX this week in Vienna. For the purpose of the free content section of this site here are my key takeaways in a summarized post-event format (live analysis and recommendations for clients only):

  • Market consensus per several sources going into this week’s OPEC+ gatherings was for a total 1.3M bpd in new production cuts. Few journalists have mentioned this relatively high number since the time during which it was heavily floated before the first meeting.
  • Thursday’s core OPEC meeting ended in disappointment with nothing remotely resembling an agreement and the stage was even set for a potential no-deal disaster on Friday. This may have partially been optics to lower expectations. Saudi Energy Minister, Halid al-Falih, is a highly competent operator when it comes to balancing public perception, politics, and real energy market fundamentals.
  • President Trump’s political pressure to avoid shocking oil prices significantly higher with a potent production cut (or any cut apparently per his Tweets) might have played somewhat of a role in both dampening the upper limit of the final number and the process to get there. Then again, Russia was also not wanting to come out swinging for a huge cut as the domestic populace there has grown weary of high energy costs.
  • A no-deal result would have allowed oil to plunge to dangerous levels for nearly every government budget involved in the energy-producing cartel. OPEC members can’t pay the bills at $30-35 WTI. They ramped up production going into the Iran sanctions and as it turned out that was not necessary. It was in every member’s strong interest to turn the spigot down enough to matter even though they all have reasons it should be every member but themselves to lose market share with cuts. Al-Falih warned of a no-deal possibility if his native Saudi Arabia was to bear nearly all cuts and nobody called his bluff because it probably was not a bluff.
  • The final OPEC+ cut deal of 1.2M bpd from an October baseline was applauded as a “larger than consensus” cut. It was only larger than the lowered estimate provided the day before by al-Falih.
  • All things considered, the deal is still significant. It sets a soft floor on crude prices, particularly on top of the 300k+ bpd in newly announced cuts coming from Canada. But it is not a catalyst to propel oil powerfully higher either. It will slowly allow the 1Q 2019 supply glut to glide toward balance, though maybe not all the way. Volatility should be relatively muted in crude going forward on the supply and demand related front.
  • Crude oil is likely to remain flat to modestly higher in the coming months, but not substantially higher.
  • If something significant changes to energy market fundamentals, it is likely further adjustments will be made in future OPEC plus non-OPEC gatherings. Many analysts have already written off the cartel as insignificant but that seems premature if we can conclude benchmark oil prices to be at least 20% artificially elevated from what would otherwise be the case in a cartel-free world. OPEC may very well be defunct within 5 years for a host of reasons but we can not say that to be the case just yet.

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