Oil Soars 6% On Optimism For Imminent OPEC Output Deal

For those curious why oil has soared over 6% in early trading, here is the one tweet explanation we posted yesterday during the peak pessimism surrounding the OPEC deal:

Indeed, shorts piled in, and now they are rushing for the exits on an unprecedented volley of relentless "optimistic" headlines. Technicals aside, the "fundamental" reason why WTI has exploded this morning...

... is because once again optimism has returned that OPEC is close to a deal to reduce supply though final terms still need to be agreed, Saudi Arabian Oil Minister Khalid Al-Falih told reporters at OPEC’s Vienna HQ, adding Riyadh would agree to Iran freezing production at pre-sanctions levels. The comments could be seen as a compromise by Riyadh, which in recent weeks insisted that Iran fully participate in any cut.

Falih also said OPEC was focusing on reducing output to a ceiling of 32.5 million barrels per day, or cutting by more than 1 million bpd, and hoped Russia and other non-OPEC members would contribute a cut of another 0.6 million bpd. Subsequent headlines expanded the scope of the cut to 1.4mmpd, following a suggestion that non-OPEC countries, led by Russia, would also cut to the tune of 600kbpd, with Russia expected to contribute 400kpbd of the cut.

The February contract in Brent crude, the global oil benchmark, was up 6.6% at $50.45 a barrel on London’s ICE Futures exchange, according to FactSet. On the New York Mercantile Exchange, West Texas Intermediate futures were trading up 5.8% at $47.83 a barrel.

“The communication this morning is extremely positive from Iran,” said Bjarne Schieldrop, a commodities analyst from Sweden’s SEB bank, adding that the market was volatile ahead of the meeting’s outcome.

Iran’s willingness to participate in some way—a long-held Saudi demand—signals a greater likelihood that all OPEC members will agree to a deal.

A successful OPEC accord is also crucial in getting non-OPEC producers—like Russia—to slash production in a collective effort to lift global oil prices. Russia has said it wouldn’t make any commitment until an agreement was forged by OPEC members.

Cited by the WSJ, Barnabas Gan, an economist at OCBC bank in Singapore said that “the fact that geopolitical rivals, Saudi Arabia and Iran, appear to have problems resolving their differences on the allocation of any cartel-wide production cuts seems to be the major stumbling block to any agreement."

The Organization of the Petroleum Exporting Countries started a closed-door session at around 1000 GMT (5 a.m. ET) with a news conference scheduled for 1500 GMT.

Here is a brief summary of all the key highlights and headlines from this morning courtesy of Bloomberg:

  • “There are good chances” and the “sticking point” remains distribution of production cuts: Al-Falih says just before group starts its formal meeting
  • Regarding Iran, Saudi Arabian Oil Minister Khalid Al-Falih told reporters at OPEC’s Vienna HQ that a“freeze at pre-sanctions level is acceptable" adding that "Secondary sources are consistent: pre-sanctions level is more or less what they have now”
  • Iraq’s minister says his country is ready to cut output within the framework of its own interests and hasn’t yet decided its level of cutback.
  • Venezuela’s minister says he expects Iran, Nigeria, Libya to be exempt from cuts while Iraq expected to cut along with other OPEC members; “we think that $60 is a fair price”
  • Oil prices rose earlier Wednesday after Iranian Oil Minister Bijan Zanganeh said he was “optimistic” OPEC is close to a deal, then rallied more on comments from other ministers, with January Brent futures topping $49/bbl.
  • Zanganeh also said: “For Iran, no reduction, no freeze. It’s a new arrangement, it’s not a freeze for any country.”
  • Prices rallied further, with Brent approaching $50, on comments from Zanganeh that non-OPEC Russia had changed its view and was ready to make an output cut.
  • OPEC are now said to be discussing a cut of 1.4mmbpd, up from the initial target of 1.2 mmbpd, with 600kbpd said to come from non-OPEC nations.
  • Several ministers, including Nigeria, made positive comments Wednesday morning, suggesting supply deal is still possible, following an a sense of deadlock earlier this week
  • Still, Indonesia says issues “not easily resolved”
  • Algeria proposed Tuesday that OPEC’s 14 members would cut production to 32.5m b/d from October level of 33.6m b/d, according to 2 delegates familiar
  • Under that proposal, Angola will cut from September level because it had some field maintenance in October
  • Nigeria, Libya would also be exempted
  • Still, OPEC will consider the 2 nations’ output in calculating group target, using YTD averages, not October levels
  • Iran has suggested freezing at 3.975m b/d; Saudi Arabia countered with a proposed cap for Iran at 3.707m b/d; Algeria recommended 3.795m b/d

To be sure, Russia already appeared to be backing away from a promise of a 400kbpd cut, saying it would be a bit "excessive."

Putting the oil move in the context of the Vienna OPEC summit here is a chart showing the price reaction across all recent OPEC negotiations:

With headlines coming fast and furious, and the squeeze smashing shorts, we expect oil to rise even more before the final deal is reached. It remains to be seen if a "sell the news" reaction will follow.