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Tomorrow at 3 p.m., This Is What OPEC’s Announcement Will Be

by | published November 29th, 2017

The market is anxiously awaiting tomorrow’s OPEC meeting at its Secretariat headquarters in Vienna.

But I’m not.

We have a virtual guarantee that the policy to extend the cap/cut in production will continue.

But that’s not the real issue.

The combination of analyst angst prior to such a continuation and the slowly building production levels among U.S. operators is providing a short-term pause in the rise of oil prices.

Even with the 1.6% pullback over the past two trading sessions, WTI (West Texas Intermediate, the benchmark crude rate for futures contracts cut in New York) is still up by more than 2% for the week and a hefty 7.2% for the month.

In short, there is little genuine risk of a cascading pricing curve setting in because there are simply no underlying factors to justify such a move.

But volatility in a rather narrow range remains a possibility.

Nonetheless, tomorrow’s extension will not be entirely good news.

In fact, my sources just handed me a bit of information that will set the stage for a major confrontation in 2018…

How Long Will OPEC’s Latest Move Last

According to my sources, the impending cap/cut production extension will only be for six months, not the full year most market observers would have preferred.

That could spell trouble in the latter half of 2018.

That’s because as the floor of the oil pricing band has risen, so has the pressure for additional volume.

At WTI prices of about $58 a barrel, much of the production sector can make a profit (especially in the U.S.).

However, the truth is it’s never been about having suspect reserves.

There are considerable amounts of excess oil that is rather easily recoverable.

Supply and demand dynamics take over at this point.

The excess nature of what operating reservoirs contain serve as only a modest cap on prices. Unless, of course, the prospects increase enough that the additional largess will be lifted and moved into the market.

Some of that is happening now.

However, the American operating environment has thinned out after a wave of mergers and acquisitions (M&A) along with flat-out bankruptcies.

The oil patch companies remaining aren’t necessarily those desperately pumping one-step ahead of the sheriff while shouldering unsustainable mountains of debt.

Rather, the players are largely those who can entertain a more realistic balance.

A Delicate Balancing Act

Oil prices remain determined globally not locally.

The rising impact of U.S. exports into higher-priced foreign markets will accentuate some of the pricing pressure, but will also provide a welcome balancing between domestic and foreign supply.

The aggregate nature of supply within OPEC is also undergoing some changes.

As I have noted here in Oil & Energy Investoron several occasions, the implosion in production by Venezuelan national oil company PDVSA (having, at least on book, the largest extractable reserves in the world) combined with persistent problems in Libya, Nigeria, and Angola means there is additional room for production beyond quota for other members.

That allows for a greater amount of leverage than might otherwise be the case.

Some OPEC countries can effectively “cheat” without the excess production adversely influencing the wider market price.

On the other hand, a major disquieting matter needs tending after tomorrow’s meeting.

Russia…

The Russian Caveat

Russia is showing signs that it may not abide by the agreement for much longer.

While not a member of OPEC, Moscow’s decision to go along with the production restraints has been decisive in keeping them afloat.

Russia remains the predominant non-OPEC worldwide producer. The U.S. may be pushing beyond 9 million barrels a day, but it is not a party to the accord.

Russia is.

OPEC accounts for little more than 40% of global production.

ans, without continuing Russian support, the production limits will not survive.

The Kremlin remains dependent upon crude oil export sales for the bulk of central budget revenue.

In addition, those sales had financed a series of off-budget projects that have accentuated the actual crisis fostered by the more than two-year decline in oil prices.

At least the current Russian official budget pegs revenues to a $40 a barrel Urals Export Blend oil price.

The previous budgets were still based upon $80 a barrel.

Nonetheless, Urals Export is a very high sulfur content (sour) crude blend and trades at a significant discount to Brent (the more used global benchmark set daily in London at a rate higher than WTI).

One of the matters having a direct effect on this ongoing drama involves Russian control over pass-through exports from other countries.

Most of Kazakhstani oil exports travel across Russia and are under the control of the Russian state transport monopoly, Transneft.

In addition, state oil major Rosneft has signed deals to accomplish the same control over a large amount of both Kurdish and Libyan export.

Each of these allows Russia to acquire crude for less than it ultimately sells it for to the global market.  That add-on is of benefit to Moscow in balancing its own accounts and may contribute to some Russian interest in prolonging the agreement with OPEC.

But a six-month extension is also a petrol version of kicking the can down the street.

The real problem is simply delayed – meaning they will have to face the music eventually.

And when they do, it will have a serious ripple effect in the global oil market that we’ll need to pay attention to.

Sincerely,


Kent

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  1. December 5th, 2017 at 23:03 | #1

    What ripple effect will we need to pay attention to

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