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Oil Won’t Crash Before The OPEC Meeting

Oil Kashagan

As we reported last week, just as OPEC announced a new monthly production record, with total output rising by 220kbpd to a record 33.4mmbpd...

(Click to enlarge)

... driven by a jump in production in Iraq, Nigeria and Libya, more confusion emerged regarding the recently concluded OPEC Algiers "deal". According to the deal, production will be cut back to 32.5-33.0 mmbpd, but opposition to OPEC's secondary production estimates has risen, as Venezuela joined Iraq in disagreeing with the cartel's third-party production estimates. Venezuela reported crude output of 2.33m b/d in Sept. to OPEC, 245k more than secondary sources estimates, while Iraq reported 4.78m b/d in Sept., 320k above secondary source estimates.

(Click to enlarge)

Making matters worse, during last week's Istanbul meeting, OPEC secretary general Mohammed Barkindo told reporters that "OPEC has still hasn't decided yet whether OPEC and non-OPEC would make cuts at the same time, or OPEC would move first". Putin added to the confusion, saying that Russia would only join OPEC if the organization agreed on a freeze, while Rosneft suggested it would only join a price freeze, not cut.

Today, the rising OPEC discord hit a crescendo when Iran, one of the few nations exempt from the OPEC production freeze agreement, said it plans to boost its oil output from the current 3.89 mmbpd to 4 mmbpd by the end of the year, complicating the producer group’s plan to cut supply in an effort to prop up prices. Shortly thereafter, Oil Minister Bijan Namdar Zanganeh added that new Iranian petroleum contracts are meant to help the country reach an even higher production plateau, somewhere in the 5 million bpd range. Iran is seeking about $200 billion of investment in its oil, natural gas and petrochemicals industries to raise production and sales, according to figures Zanganeh presented Monday at a conference in Tehran.

Needless to say, Iran's increasingly ambitious intentions to absorb existing market, mostly from the likes of Saudi Arabia, will be a major hurdle during next month's Vienna negotiation, when the country quotas are expected to be set.

“The difficulty in implementing the deal will be with the potential for production increases within OPEC,” Giovanni Staunovo, a commodities analyst at UBS told Bloomberg. “It may also be a bargaining chip, as what everyone wants is to get into the OPEC talks with a higher level of production from which to cut or freeze.”

But the biggest complication to emerge today, is that Iran has joined Iraq and Venezuela in questioning OPEC's estimates of production. As can be seen in the table above, Iran's output has been estimated by OPEC outside sources at 3.665mmpd, while Ali Kardor, managing director of National Iranian Oil Co., said at a conference in Tehran today that Iran pumped 3.89 million barrels of oil a day in September. Naturally, Iran is looking to present as high a number as possible to be allowed to set the highest possible production quota.

As Bloomberg adds, Kardor disputed the accuracy of OPEC’s data on the country’s production, echoing the words of Iraq's oil minister when he said that "figures based on estimates from secondary sources such as analysts and journalists are not acceptable" for use in determining the country’s output quota. The accuracy of OPEC’s secondary-source data is important because the group may use the information to set individual member quotas.

Meanwhile, as OPEC bickers over who producers what, Iran is busy creating the infrastructure that will allow it to produce even more. From Bloomberg:

Iran is ramping up efforts to woo foreign investment in an energy industry stunted by years of sanctions. NIOC on Monday began soliciting documents from international companies to pre-qualify as bidders to develop the country’s oil and natural gas fields, according to an announcement posted on its website. Interested companies will have until Nov. 19 to submit their qualifications, and the government will publish a list of eligible bidders on Dec. 7, according to Shana, the Oil Ministry’s news service.

The country may tender the first field, the South Azadegan deposit, to international companies as early as November, NIOC Managing Director Kardor said. Total SA of France had been developing a technical program for development of the field after signing a data-sharing agreement with Iran earlier this year, Kardor said. NIOC signed 10 agreements giving foreign companies access to data on its fields with the aim of bringing in partners to boost output, he said.

Total is also in the running to develop Iran’s South Pars 11 gas development, Kardor said. A first oil development agreement with an international company could be signed by March for South Azadegan, he said.

While the daily bickering is sure to get even worse until the November 30 OPEC meeting in Vienna, Reuters reports that hedge funds and other money managers have decided they no longer can afford to wait, especially with year-end bonus time rapidly approaching, and raised their bullish bets on U.S. crude prices to the highest level since the slump started in the summer of 2014 as shorts throw in the towel once again. Related: Why Algeria Will Be A Key Part Of Any OPEC Deal

Hedge funds raised their net long position in the two main futures and options contracts linked to U.S. crude WTI by 39 million barrels to 292 million barrels in the week to Oct 11. The combined position was the highest since July 2014, when WTI prices were still trading above $100 per barrel and the long slide in prices was just beginning.

(Click to enlarge)

For those who enjoy modestly convoluted charts, here is one from John Kemp showing the dramatic shifts in HF short positioning in spot WTI.

(Click to enlarge)

While it is difficult to predict what happens next...

... usually any time HF positioning has reached an extreme in either side of the X-axis, this has been promptly followed by a "max pain" type of move in the underlying; if past is indeed prologue, expect a sharp move lower, especially now that even Morgan Stanley's Adam Longson - one of the longest running oil bears - said in a note overnight that oil is set to trade higher until the Nov. OPEC meeting:

“OPEC’s intervention pushed any shorts to the sidelines for now and should keep prices in the upper part of our trading band until at least the Nov. 30 meeting in Vienna.”

The shorts may indeed be gone, but with confusion rising and the threat of the deal falling apart the closer we get to the Vienna meeting, it may be the 2+ year high in longs that is responsible for the next big move lower.

By Zerohedge

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