Oil Tumbles As OPEC Deal Seen Increasingly Unlikely: SBC Says "Very Low Chance" Of Agreement

Tyler Durden's picture

One day ahead of OPEC's much anticipated meeting in Vienna, oil has slid back under $46 on rising pessimism that an oil production cut deal, taken widely for granted as recently as last week, is not going to take place.

Here is the latest rundown of events heading into the Wednesday meeting.

As Bloomberg highlights, Russia’s absence from discussions in Vienna is creating complications for OPEC members that insist on participation of non-members in supply cutbacks with one day to go before OPEC ministers meet to decide policy.  Earlier today, Russian Energy Minister Alexander Novak said he has no plans to visit Vienna on Wednesday, but Russia is ready to talk with OPEC once group reaches an internal consensus

Meanwhile, as reported yesterday, Iran, Iraq continued to express objections to cutting their own supply during lengthy meeting of OPEC officials Monday, as talks failed to bridge differences, one delegate said. In Monday’s talks, Saudi offered proposal for Iran to freeze its own output at 3.707m b/d; Iran offered to cap its output at 3.975m b/d: delegates; at the same time mediator Algeria proposed that Iran freeze at 3.795m b/d, and amount which was greater than the 3.69m b/d Iran pumped in October according to secondary sources. Yesterday's unsuccessful talks also didn’t reach agreement on Iraq; Algeria proposed Iraq cut 240k b/d from its October level

That said, in keeping an appearance of optimism, Iraq’s minister told reporters in Vienna Tuesday he’s still very confident about OPEC meeting.

Surprisingly, today's dose of cold water came from an unexpected source, when Indonesia energy minister Ignasius Jonan told reporters in Vienna that he has “no expectation” ahead of the OPEC meeting, and that his country has “mixed feelings” about the meeting, but will listen to major players in group. He is expected to meet his Iranian counterpart tonight.

“There are growing thoughts that after much rhetoric and bullish chatter, OPEC won’t be able to find an accord,,” says Nick Williams, commodities futures broker at GF Financial Markets. “The Indonesian minister’s comments only added to that.”

And speaking of logistics, Saudi, Iran ministers are expected to arrive in Vienna Tuesday afternoon along with other ministers. Algerian Energy Minister Noureddine Boutarfa, who has been negotiating with Russia and Iran, told reporters in Moscow he will go to Vienna today. The delayed Saudi arrival comes after energy minister Al-Falih hinted on Sunday in Dhahran that OPEC doesn’t necessarily need to cut output; comment viewed by analysts as a bargaining position that could result in price crash if no deal is reached.

As a result of all the rising chaos, oil traders are s understandably skeptical, and as Goldman calculated in a note overnight, the oil market is pricing in only a 30% chance of a deal to cut output emerging tomorrow. As Bloomberg reports, "Brent crude may swing $6 a barrel on Wednesday, based on implied volatility for options contracts, analysts including Damien Courvalin and Jeff Currie said in a report Monday. Futures would rally into the low $50s a barrel and average $55 over the first half of next year if the group agrees to a cut, according to the bank. Failure to reach an accord would mean prices would average $45 a barrel through the summer."

As a reminder, just last week Goldman turned bullish on the OPEC agreement, saying on November 21 that it now expects OPEC to real a production cut deal, in the process raising its Q1 and Q2 2017 oil price forecast; the contrarians in the audience will note by doing so it may have doomed the deal.

Others have taken the other side of the bet, and overnight Bjarne Schieldrop, chief commodities analyst at SEB, says that he thinks there is a "very low chance" of an OPEC oil-output cut tomorrow.  The analyst expects more comments along the line of Saudi Arabia’s “don’t really need a cut” assertion from Sunday. 

“It becomes imperative to save face,” Schieldrop said adding that OPEC may be “kicking the can to the next OPEC meeting in half a year’s time.”

He also noted that Iran’s offer to cap output at 3.975m b/d means effectively no cut, given avg 2000-2008 production was 3.78m b/d. “It is unacceptable for Saudi Arabia that Iran does not pitch in with a cut” and added that for Iraq, important issue is what country really produced in October, which is baseline month for cuts.

What happens if he is right? Oil is “likely to trade to the downside of $45/bbl as a no-cut is actually communicated, then will return toward $48."

* * *

For now the market is agreeing with the SECB analyst, and WTI has tumbled below $46 in early trading.

Finally, here is a good take by Bloomberg energy analyst Julian Lee why tomorrow's deal is "looking trickier each day"

Whatever your view on the inner workings of OPEC, achieving an unconditional deal on Wednesday is looking trickier by the day as the group pushes non-member producers to join the curbs.

OPEC so far asked non-member producers to cut their combined output by about 500k b/d to 880k b/d, according to various officials including Russia’s and Azerbaijan’s energy ministers

Failure to hold a meeting Monday between OPEC, non-OPEC -- after Saudi Arabia said it would skip the gathering -- took away an opportunity for both sides to negotiate the finer details of what they would accept in terms of supply restraints. Saudi Arabia’s reason for not attending was because kingdom wanted OPEC to do its own deal before talking to non-member producers, a delegate said

Alexander Novak, Russia’s energy minister, has no plans to go to Vienna on Wednesday, meaning the leader of those non- OPEC suppliers being asked to curb won’t be present

These developments suggest a growing probability that, if anything is to come out of tomorrow, it will be an internal agreement from OPEC that would then be presented to non- members, requiring their participation

While it’s possible OPEC will decide that non-members don’t have to join curbs -- making an unconditional deal possible on Wednesday -- this would be a reversal for Saudi Arabia, which wants the widest possible participation in supply limits

An internal deal is by no certainty either:

  • There remain divides within OPEC that are not clearly resolved at this time, particularly around Saudi Arabia, Iran and Iraq’s positions
  • For Saudi Arabia, sharing the burden is more important than simply securing an agreement at any price
  • Despite its willingness to reduce output, it still insists that the cuts are shared equitably
  • At the same time, both Iran and Iraq must make sacrifices for Saudi Arabia to accept the deal

Iran takes opposite view, insisting Saudi should cut more, as it boosted output most in recent years: oil producers that raised output in past years while Iran was subject to sanctions “will have to shoulder a bigger share of the output drop and accept more responsibility”: oil minister Bijan Zanganeh

Wider Saudi-Iranian conflicts make resolving differences even more difficult

Iraq’s favored position is to freeze, counter to a Saudi Arabian offer that it should cut

Saudi Oil Minister Khalid Al-Falih has raised the possibility of the meeting ending without agreement

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Bill of Rights's picture

Meaningless drivel from these clowns...End our dependence on foreign oil..

VinceFostersGhost's picture

 

 

Tanker congestion alert off the coast of Galveston.....seek alternative routes.

Pairadimes's picture

This is hilarious. It seems like they do this every couple of months, with the same general outcome.  I don't suppose any of these knuckleheads have heard about game theory, or the prisoner's dilemna?

NoDebt's picture

"As a reminder, just last week Goldman turned bullish on the OPEC agreement, saying on November 21 that it now expects OPEC to real a production cut deal, in the process raising its Q1 and Q2 2017 oil price forecast; the contrarians in the audience will note by doing so it may have doomed the deal."

Ah yes, there's Goldman again taking the other side of the trade against their clients.  

King Tut's picture
King Tut (not verified) Bill of Rights Nov 29, 2016 9:23 AM

Still long oil?

Bill of Rights's picture

Yes, no reason not to its just bouncing around, unless you see something I don't ...But then again why would I ask a shill non trader that type of question.

south40_dreams's picture

I'm so.....SURPRISED

Nunyadambizness's picture

Good!  Now I hope to see some savings at the pump soon.

orangegeek's picture

Hey Tylers,

 

Any news about #PIZZAGATE?

 

ZHers want to know more.

VinceFostersGhost's picture

 

 

Did you see the tweet from Andrew Breitbart......you know......right before he died?

 

We need Stein to start recounting every state in the union......I don't care if they're certified or not.

 

Turn those machines........BACK ON!!!

jmack's picture

cue tom petty free falling  for gold this morning...

King Tut's picture
King Tut (not verified) jmack Nov 29, 2016 9:25 AM

Arrrrrr- all of the pirates on ZH are going to be mighty butthurt, matey.

Arnold's picture

Just checked, all shiney safe and sound.

Paper fiatski, not so much.

VinceFostersGhost's picture

 

 

Bought gold at $273.

 

If it gets below that......I'll probably buy some more.

hankwil74's picture

Should have sold when it got above $1900, no?

Last of the Middle Class's picture

Nothing better than the smell of a sand nigger in the morning who has controlled an essential commodity for years becoming irrelevant.

hankwil74's picture

Wasn't this the place where everyone was raving about "peak oil" a few years ago? Between long "precious" metals and "we're running out of oil", this place is KILLING IT with their predictions!

nothingtoseehere's picture

Say hello to David Brock for me you piece of shit

Stan Smith's picture

Then -- "We're running out of oil"

Now -- "The world is awash in oil"