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$30 Oil Or Worse If OPEC Fails

Oil Rig

After the worst week for oil since January, crude prices firmed up on Monday ahead of Tuesday’s historic election.

Oil dropped 10 percent last week, in large part due to lowering expectations that OPEC could succeed in working out a production cut at the end of the month and also because the EIA reported a record high build up in oil inventories. Oil dropped below $45 per barrel, hitting nearly two-month lows.

Of course, the elephant in the room is the U.S. presidential election. While not directly related to oil prices, the financial markets have been reacting in dramatic fashion to recent movements in the polls. And as Bloomberg reports, they have a clear preference for who they want to win: Hillary Clinton. The former Secretary of State is seen as a known quantity, while Donald Trump as a wildcard. When Trump moved up in the polls global stock markets dipped, and the markets gained as Clinton’s fortunes improved.

The dynamic played out again on Monday when the FBI cleared Clinton of wrongdoing in the latest cache of emails. Global stock markets and commodity prices soared on the news, as the odds of a Clinton victory seemed to improve. “European shares rebounded from a four-month low and Asian equities rose with S&P 500 Index futures after the boost for Clinton, who is seen by investors as the more predictable presidential candidate,” Bloomberg news wrote. Oil prices also rose, as the risk to the global economy appeared to wane.

But with the presidential campaign mercifully at an end, the oil markets will refocus on OPEC, the next major catalyst for crude prices.

Related: Why Should Investors Take OPEC Seriously Anymore?

And there is mixed news on that front. New supply from OPEC casts doubt on the prospects of a deal. Iran, Iraq, Libya and Nigeria added about 450,000 barrels per day of additional output in October compared to September levels, which is more than half of the amount of oil that OPEC promised to cut. At the meeting in Algiers at the end of September, member countries promised a cut of somewhere between 200,000 and 700,000 barrels per day.

But if the deal is to count for something, the cuts will have to be much deeper to offset the additional supply from the four countries demanding to be exempted from the pact. The onus will almost entirely be on Saudi Arabia, but a cut of more than 1 million barrels per day of production might be too much to ask for. John Kilduff, a partner at Again Capital, says that no deal will be struck in Vienna at the end of the month, and the failure will push oil back down into the mid-$30s. The disaster of yet another OPEC failure will even put “the February low of $26.05 back in-play, into year-end,” he wrote in a CNBC commentary.

However, that outcome is not inescapable. OPEC officials are trying to strike a positive tone, and made some small but significant progress on technical details recently. The group apparently settled on using the “secondary sources” data for how it will calculate the production cuts. The data comes from the EIA, the IEA, Argus Media and other organizations. The compiled data is the basis for OPEC’s production figures, but Iraq has charged that the data is undercounting Iraqi barrels. The Wall Street Journal reported last week that OPEC has agreed to stick with the secondary sources. If Iraq signs on, that increases the odds of a deal in a few weeks’ time. Recognizing the small bit of good news, oil prices jumped 1 percent on Monday.

And while the OPEC negotiations have not appeared to be going all that well, some of the stubbornness and inflexibility could be bargaining tactics. There is little incentive for individual countries to offer concessions ahead of time, as John Kemp of Reuters noted.

Related: Boone Pickens On Natural Gas: It’s The Way To Defeat OPEC

In an effort to push a deal forward, Saudi Arabia reportedly issued an ultimatum to Iran. Saudi officials threatened to intentionally crash the oil price again if Iran did not come on board with production cuts. "The Saudis have threatened to raise their production to 11 million barrels per day and even 12 million bpd, bringing oil prices down, and to withdraw from the meeting," an OPEC source told Reuters.

Ramping up to 11-12 mb/d and essentially pursuing a scorched-earth policy and price war would indeed sink oil prices to new lows. If the Saudis are serious about that threat, there are two possible outcomes from the late-November meeting in Vienna. OPEC agrees to cut production, likely pushing oil back up into the $50s per barrel, or they fail to do so, leading to a price war that crashes prices well below $40 per barrel.

By Nick Cunningham of Oilprice.com

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Leave a comment
  • JustMeNS on November 07 2016 said:
    John Kilduff is quoted as if he knows something. As shown in past quotes, he is quessing and hoping it comes true. OPEC is in trouble if they do not get an agreement as you can only talk up oil so many times. I believe this is posturing and it is heated because there is too much at stake. All the countries need increased revenues NOW. We shall see.
  • JP DeCaen on November 07 2016 said:
    Given that no one can afford to have prices in the 30's, how long would the situation last? Perhaps if the price crashes, oil investors will finally get the message: OPEC has no credibilty. Oil investors are atarting to look like a bunch of fools by reacting to OPEC's every word.
  • adec on November 08 2016 said:
    Gartman has predicted something more sensational...
  • Oilracle on November 08 2016 said:
    --"$30 Oil Or Worse If OPEC Fails"---

    1) Why "worse?", cheap energy is the best!

    2) OPEC is "a cartel" what is illegal inside the US. It should not be allowed to exist.
  • Karthik Srinivasan on November 08 2016 said:
    Saudi Arabia is in a tough predicament. They need to cut production by 10% at least to make a deal work and boost oil prices into the low $50s. In doing so, they are inviting US shale to start ramping up even more than it is already planning to do. Listening to many earnings calls from E&Ps, you hear about capex bottoming and rising 10-20% in many cases. Production growth is even faster for many given the inventory of DUCs. Moreover, can OPEC really count on Russia complying with requests for flat production if prices rise substantially?

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