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Can Oil Hold Onto OPEC Deal Gains?

Offshore sunset

Oil held onto gains on Friday afternoon after front month contract rolled over to the December contract.

 

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Friday, September 30, 2016

OPEC did the unthinkable – it decided to cut production for the first time since the global financial crisis in 2008. The group met in Algiers and decided to cut its production from 33.24 million barrels per day (mb/d) to a range of between 32.5 and 33.0 mb/d. The details will be finalized in November, but the tentative deal succeeded in boosting oil prices more than 6 percent on Wednesday, and by another 1 percent on Thursday.

Deal still uncertain. There are plenty of reasons OPEC won’t reach a deal. The group did not allocated production limits to each of its members, so it is still unclear who will be cutting. Also, some of the members could cheat, even if they do seal the deal in Vienna in November. Moreover, if the cap is placed at the high end of the range – 33.0 mb/d – it would amount to a very unimpressive cut of just 200,000 barrels per day. On top of that, Nigeria, Iran, and Libya are exempt from the limits. They are allowed to produce at “maximum” levels, and combined they are hoping to bring back 1.5 mb/d. The psychological effect on the oil market has been enormous, with oil prices up big on the week. But with oil traders starting to question the viability and the significance of the deal, the rally came to a temporary halt on Friday.

Iraq questions numbers. Another unexpected sticking point could be Iraq, which is no longer exempt from OPEC limits after years of special treatment as it recovered from war. Iraq’s oil minister questioned the data that OPEC was using – the minister argued that Iraq was producing much more than OPEC was giving it credit for. The discrepancy would potentially limit Iraq’s production more than it should, Iraqi officials say. The conflict poses another stumbling block for the November meeting.

Related: The Shakeout Continues: 100 Oil And Gas Bankruptcies Yet To Come

Saudi Arabia needed a deal. The OPEC production cut only came because Saudi officials did an about-face, a 180-degree turn from its position over the past two years of letting the market sort out the surplus. The Wall Street Journal reports that Saudi officials, including energy minister Khalid al-Falih, grew concerned about the economic toll on the kingdom from persistently low oil prices. The minister reportedly became alarmed from the latest forecast for oil prices remaining low through 2017, and the revelation was enough to lead the Saudis to reverse course. “I’m not convinced they have changed from the market-share policy but I have to think they have erased the ‘We don’t care if it goes to 20 $/bbl’ policy,” Olivier Jakob of Petromatrix told the WSJ. “They seem less idealistic, a little more realistic.”

Refiners down on OPEC deal. The surge in oil prices will be welcome by producers, but not by refiners. The BI North America Refining & Marketing index, an index of refiners, dropped by 4.6 percent on Thursday. Higher oil prices is bad news for refiners, which need to purchase crude in order to process it into refined products. Gasoline inventories are still high, and margins are low, Moody’s said, a problem that could persist for some time.

Oil analysts not impressed by OPEC cut. Oil prices skyrocketed this week after OPEC came to terms, but seasoned oil analysts are not exactly overwhelmed. Several major investment banks – including Goldman Sachs, Societe Generale, Jeffries and UBS – did not alter their oil price forecasts on the news. Citi’s Ed Morse said the decision is “still kicking the can down the road.” Goldman, however, did say that if the deal is implemented, it could add $7 to $10 per barrel to the oil price next year.

U.S. Congress overturns Obama’s veto on 9/11 bill; but now regret it. This week both the U.S. House and Senate overwhelmingly overturned President Obama’s veto of a bill that would allow the victims of the 9/11 terrorist attacks to sue Saudi Arabia. But by Thursday, many of them expressed regret for doing so, fearing reprisals for Americans abroad. It’s a bizarre development from the Congress, given that the President explicitly vetoed the bill for just that reason. The bill also threatens to disrupt the relationship between the U.S. and Saudi Arabia, and Saudi stock exchange took a beating as the bill progressed.

Related: Is The Eagle Ford About To Stage A Comeback?

Court decision in Pennsylvania could hurt shale gas drilling. The Pennsylvania State Supreme Court overturned an industry-friendly law that could be a burden for shale gas drillers. The court ruled that the 2012 law unfairly favors the gas industry. The law allowed drillers to notify public water suppliers but not private well owners about spills or leaks. It also restricted health care professionals from obtaining information about the chemicals used. The court ruling also struck a blow against eminent domain, a procedure that allowed gas drillers to seize private and public land for drilling. Opponents of fracking in the state hailed the ruling, but the Marcellus Shale Coalition, an industry trade group, said it would make investment difficult.

Deepwater Horizon movie a headache for BP. The British oil giant may have thought it put the 2010 disaster behind it, but a new movie about the Deepwater Horizon disaster paints the oil major in a very bad light. “Deepwater Horizon,” starring Mark Wahlberg, Kate Hudson and John Malkovich releases on Friday. The movie is particularly ill-timed for BP as the company is hoping to drill off of Australia’s southern coast and has run into stiff environmental opposition. Australian regulators sent a request this week to BP for more information regarding its oil spill response plan. Critics of BP have used the example of Deepwater Horizon to argue for blocking the drilling plan in the Great Australian Bight.

By Evan Kelly of Oilprice.com

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