Unlike last year's "Thanksgiving Day" crude massacre, when oil plunged when Saudi Arabia effectively "decartelized" OPEC, this time there is far less excitement ahead of today's OPEC meeting decision, which can be summarized in three words: confusion, clashes and disappointment.
Confusion, as the two main blocks within OPEC (the low-cost Gulf state producers vs everyone else) demand two entirely different things; Clashes as the Venezuela-led block begging for production cuts alleges it is all Saudi Arabia's fault even as the Saudis say demand will pick up and offset a market which has 1-2 million barrels in excess production according to Iran, and ultimately Disappointment, as the views by the two blocks are ultimately unresolvable as the Saudis have no choice but to continue their crusade against US shale production even if it means a few OPEC casualties in the process, most notably Venezuela, whose political situation is getting more precarious by the day.
Still, for now the Virtu algos have pushed WTI higher for the 2nd day following a constant barrage of headlines which has confused the headline scanners. "There has been a bunch of headlines coming out of OPEC with each contradicting the other," says Petromatrix analyst Olivier Jakob. “It is difficult to trade in front of OPEC - the general consensus is for nothing, but when we get a soundbite that creates a bit of a reaction."
Expect the euphoria to end momentarily once the OPEC press conference takes place some time after its scheduled time of 3pm, once Saudi Arabia makes it clear it will hold the line on insistence big non-member producers such as Russia join any output cuts by OPEC while Russia doesn’t see output cut as viable, energy minister says in Moscow. That will be bad news for the high-cost OPEC producers.
As Bloomberg reports [10]"with cash-strapped countries including Venezuela, Ecuador and Algeria are pressuring Saudi Arabia to cut production. The Saudis, the world’s largest oil exporters, have stuck to their one-year-old view that any output cuts won’t work unless big producers outside OPEC, including Russia and Mexico, join. If prices recover sharply, it could revive some U.S. shale production, displacing OPEC crude, which would mean the Saudis have to start from scratch.
Russia, Mexico and other big producers outside OPEC have given no indication they would agree to any OPEC-led output cuts. Russian Energy Minister Alexander Novak said Thursday that the country doesn’t see a production cut as viable.
At the informal gathering in a Viennese hotel, Venezuela tabled a proposal to reduce current production by about 5 percent, the person said, asking not to be identified because the meeting was private. Several other countries backed the proposal, the person said. Nigerian Minister of State for Petroleum Resources Emmanuel Ibe Kachikwu said Saudi Arabia didn’t propose a cut.
Ecuador Oil Minister Carlos Pareja said the pre-meeting - unusual in recent years and held in a hotel rather than at OPEC’s headquarters - was "difficult.” “We didn’t manage to reach an agreement yet,” he said.
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So what does all this mean for oil prices? Nothing good: according to a WSJ [11]report on an internal OPEC document written to prepare a crucial meeting Friday warns oil prices will remain under pressure in the near future while markets would remain oversupplied even if the cartel cut its production.
The analysis, which was reviewed exclusively by The Wall Street Journal, underscores the conundrum faced by the Organization of the Petroleum Exporting Countries as it tries to respond to an oil price slump. At the meeting Friday in Vienna, a heated debate is expected between a faction that wants a reduction in production to boost prices and another arguing such a move would only give away market share to competitors such as U.S. tight oil.
The document, a transcript of a technocrat meeting last week to prepare the summit, warns that “overall the current surplus, while easing, should continue to cap the upside in oil prices for the coming quarters.” OPEC’s secretariat says in a transcript of its meeting that took place last week. The Economic Commission Board—as the technocratic meeting is called—gathers experts to advise ministers before an OPEC meeting on the possible outcomes of their decisions.
The document shows that, if current production remains unchanged at 31.5 million barrels a day, markets will still be oversupplied by 700,000 barrels a day in 2016—though that would be less than the glut of 1.8 million a barrel a day OPEC estimates for this year.
With non-OPEC production bringing about a global oil glut, countries like Venezuela and Iran have called in recent days for an output reduction to bring back the group’s production to its agreed level of 30 million barrels a day. They won't get it, and the result is that oil may very well trade to Goldman's near-term target in the mid-$20s on very short notice.
