Why You Should Expect A Substantial OPEC Deal

OPEC ministers are again meeting, this time in Doha, but haven't yet showed a sign of a sweeping deal that could come out of Vienna and OPEC later this month. But I believe it's going to be a lot more substantial that just about any other analyst thinks.

The markets are saying there won't be much if any cut from OPEC and non-OPEC states from the meeting that's going to take place on November 30th. A deal to limit OPEC to 32.5m barrels a day that was first suggested in Algiers in October would send oil prices well over $50 a barrel. Today, the $46 price you're seeing represents a market that surely expects nothing from this meeting. I think the market is wrong.

The pressure to generating a production deal is being spearheaded by Saudi Arabia, although Nigeria and Venezuela would certainly approve. And the Saudis have certainly changed their tune in lots of substantial ways in 2016: They've begun floating sovereign bonds, a first time for them in beginning to monetizing national oil assets. They're engaged in a real struggle for power inside the Saudi family, with young Prince Salman gaining public prominence over the older Prince bin Nayyef, still first in line for succession. Their military excursion against the Houti into Yemen isn't going well. Younger Saudis are calling for a faster progression towards 'Vision 2030' and a relaxation of social restrictions inside the kingdom.

But, most importantly, the Saudi and OPEC strategy to fight for market share and allow the oil price to freely float downwards - a move they began in 2014 and they expected would quickly destroy their competition - has not worked out nearly as well as they had hoped. US shale producers have shown a remarkable resilience in weathering low oil and gas prices, and many of the largest producers here in the US that the Saudis had hoped would be out of business by now are still here - perhaps not thriving, but certainly alive.

And that, more than anything else, has pushed the Saudis to totally abandon their free market strategy. They again want control the global price of oil and to move it higher in order to finance their own strategic and economic goals.

Since Algiers, the Saudis have been crazily running around, and have a heavy schedule continuing to run around the globe until November 30th. They are frantically trying to get cooperation inside OPEC to reduce production to the newly targeted 32.5m barrels a day. Instead of cooperation, they've been met by a huge new output of oil, not only from OPEC members, but from Russia as well. Iran and Iraq have been particularly unreceptive. Both have been ravaged in the last several years - Iraq through war and Iran through sanctions - and both want to have a free rein to get production back to much higher levels:

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But here are a few reasons why I think this meeting will finally find all of the players on the same page and ready to deal:

The Iranians and Iraqis might want to ramp production forward, but several sources I have seen indicate that all the 'easy' barrels have already been recaptured, and it will be near impossible at the moment for Iran to get to the 4m barrel target and Iraq to get to their 5m goal. Neither of them, as a practical matter, will be much burdened with a freeze, or at least a small commitment to limiting growth for a year or more. Second, and more importantly: I've learned to never discount what the Saudi oil minister says - ever. When he's said that oil prices will rise, they have risen. When he's promised an oil output increase, it has come. And now when he believes an OPEC deal will be done, I'll be betting that it will be done.

I believe the stubbornness from OPEC members and Russia are little more than posturing - Hardball stances to get as good an individual deal as they can later this month. All of them need global supply to re-balance soon, if not more than the Saudis themselves. And like the Saudis, they all have taken steps to increase their production near to their possible limits in anticipation of a freeze or a moderate cut. At this point, it does not burden any of them much, while benefiting all of them greatly.

Therefore, I think the November meeting in Vienna will deliver a substantial agreement where other meetings have failed. And oil will subsequently rally strongly.

And we'll need to re-position ourselves for that rally - which I will talk about in my next column.