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What’s Behind The New OPEC Skepticism?

Rig

OPEC+ took action to cut supplies from the market last week and threw themselves and U.S. frackers a substantial short-term lifeline. In terms of price action, the 1.2m bpd cut (to begin in January) seems to be mostly in line with what the market expected as Brent crude has flattened out near $60/bbl.

The tepid price movement following the announcement of the deal highlights both the bloated status of physical balances as well as the market’s expectation that U.S. producers will comfortably be able to keep a lid on prices in the near term. Traders are highly reluctant to resume the bullish enthusiasm they felt in early 2018 and have kept time spreads securely in contango. Analysts seem to feel similarly with the EIA reducing their 2019 Brent forecast to $61/bbl while Citi sees Brent trading in a $55-$65 range next year.

Market skepticism related to OPEC and OPEC+ production cuts isn’t new. Decisions made by the group to balance oil supplies with demand have always been met suspiciously as traders have questioned whether the group would actually self-impose the cuts they agreed to. This was certainly true the last time cuts were made in 2016 and prices slowly adjusted higher as data revealed that the group was highly disciplined in hitting quotas. What seems strikingly different this time around, however, is that the skepticism related to OPEC+ cuts seems to be that they lack the efficacy to shock the market higher because so many of the cut barrels…

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