OPEC

Disappointed "this time it's different" analysts point out better-than-expected China PMI, a relatively large decline Friday for U.S. rig count, and overall sentiment today as reasons why crude oil prices should not be falling, but after hitting 2 week highs Friday, with algos running stops on every swing, it appears the harsher reality of China's full storage, plunging tanker rates, an unquivering OPEC, and ongoing production levels is too much to bear for the bulls...

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On a day full of Manufacturing/PMI surveys from around the globe, the numbers everyone was looking at came out of China, where first the official, NBS PMI data disappointed after missing Mfg PMI expectations (3rd month in a row of contraction), with the Non-mfg PMI sliding to the lowest since 2008, however this was promptly "corrected" after the other Caixin manufacturing PMI soared to 48.3 in October from 47.2 in September - the biggest monthly rise of 2015 - and far better than the median estimate of 47.6, once again leading to the usual questions about China's Schrodinger economy, first defined here, which is continues to expand and contract at the same time.

The Pentagon just won another small skirmish in its long war with Social Security and Medicare. That is the unstated message of the budget deal just announced gleefully by congressional leaders and the President.  To understand why, let’s take a quick trip down memory lane.

Venezuela has two immediate bond payments due this and next week amounting to $3.5 billion. Where did the near-insolvent country obtain the funds needed to make these debt payments? The answer: it has been dumping its gold, which its former ruler Chavez worked hard in 2011 to repatriate from London, and which its current president Maduro, just four short years later, is busy sending back to its creditors.

It is possible that we might witness the formation of two blocks within OPEC during the next December 4 meet in Vienna. One, led by Venezuela, Ecuador, Libya and Algeria that would want to reduce production levels and the other led by Saudi Arabia, UAE and Kuwait that would stick to the current strategy of defending market shar. In the end, it will come down to survival of the fittest. Players who have higher breakeven costs will be the ones who will blink first and thereby reduce their production levels.

Two biggest move overnight came from everyone's favorite carry pair, the USDJPY, which may have finally read what we said yesterday, namely that with the Fed and ECB both doing its job, there is little need for the Bank of Japan to repeat its Halloween massacre for the second year in a row, and as a result will keep its QQE program unchanged. It promptly tumbled from its 121 tractor level, to just above 120.25, where BOJ bids were said to be found. With the FOMC October meeting starting today, the other overnight catalyst was not surprisingly the latest Hilsenrath scribe in which he removed any uncertainty about a Wednesday hike, "leaving mid-December as the central bank’s last chance to raise rates this year."

OPEC altered the course of the oil markets last year when it decided to cast aside its traditional role of maintaining balance through production cuts. Instead it pursued a strategy of fighting for market share, contributing to an immediate rout in oil prices. WTI and Brent then went on to dive below $50 in the weeks following OPEC’s decision. OPEC is widely expected to continue its current strategy at its next meeting, and as such, no rebound in oil prices is expected, at least not because of the results of the group’s meeting in Vienna. But that raises a question about what the world of oil expects from OPEC: Why is it that the responsibility for balancing the market falls on OPEC? Why should OPEC be the one to fix the imbalances in the global crude oil trade?

With Russia now in the driver's seat in terms of supplying crude to China, and with Iranian supply set to come back online with the lifting of economic sanctions, Saudi Arabia faces a serious threat to its dominance of the global oil market. Given the increased cooperation between Moscow and Tehran in Syria, it comes as no surprise that Ruusia and Iran are now in talks on some $40 billion in energy projects which the two countries say could lead to the formation of a new development bank.

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Despite the intense pain they are suffering in the low price Crudedome, both the Russian and Saudi governments profess for public consumption that they are committed to their volume and market share policies. This observer believes the two countries cannot long withstand the pain they have brought upon themselves - and this article only scratches the surface of the negative impact of low crude prices on their economies. They have, in effect, turned no pain no gain into intense pain no gain and set in motion the possibility neither will exit the low price Crudedome under its own power.

With Saudi's short-changing contractors, record inventoriers in US and Saudi, and looming OPEC meetings, it appears the biggest marginal driver of crude price (for now) is China. After Friday's algo-driven exuberance, China's worst GDP print in 6 years and weak industrial production have prompted weakness in the energy complex (China SPR build aside), pushing WTI back to a $45 handle once again...

As Bloomberg reports, "Saudi Arabia is delaying payments to government contractors as the slump in oil prices pushes the country into a deficit for the first time since 2009."

"[Putin] hopes that when its ally Iran re-enters the global oil and gas market, Russia will somehow share in the profits, perhaps through new pipelines across Syria. He also wants to stop the Saudis from establishing export routes in Syria. Now that Russian energy supremacy in Europe also is at stake, Putin's determination to resolve the Syrian conflict on his terms can only grow."