OPEC at Critical Decision Point

12/05/2019 12:22 pm EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Will OPEC cut production and will Russia go along? That is the main questions to be answered at the OPEC meeting this week, reports Phil Flynn.

Silly side talks, oil price hawks, dressed in mighty high style, in the air, there’s a feeling of OPEC. Members clashing, oil slashing, meeting time after time, and on every press conference you’ll hear. Oil wells. Iran rebels, soon it will be OPEC day.

Well OPEC day is here, and the eagerly awaited announcement about their intention on production going forward will be the driving force of the day. Signals are coming from Vienna and the market appears to believe that Saudi Arabia can convince OPEC and Russia to agree to a larger production cut. That may be because the Saudis might have made a threat to the freeloaders in the cartel to comply with cuts or else Saudi Arabia might stop carrying the load. 

The Wall Street Journal reported, “Saudi Arabia is threatening to boost oil production unilaterally if some OPEC nations continue to defy the group’s output curbs, cartel officials said. The ultimatum comes ahead of a gathering between the cartel and oil-producing allies, including Russia, on Thursday and Friday in Vienna. Saudi Arabia, OPEC’s de facto leader, is contending with weak oil prices and members of the cartel who aren’t complying with the collective output cut they agreed to last summer.”

Of course, that story, in part, inspired the black and blue Friday sell-off in oil. Yet it appears that the members got the message. In fact, according to the latest S&P Platts data, OPEC cheaters are getting in line. OPEC pumped 29.65 million barrels of crude oil a day in November. They said that 11 members with quotas under OPEC+ deal achieved 145% compliance – 370,000 barrels-per-day under their quotas. They said Iraq and Nigeria are still producing above their cap but getting closer to being back to the quota.

Reuters reported, “OPEC’s second-largest oil producer Iraq said on Tuesday Saudi Arabia was supporting deeper cuts for OPEC+ to 1.6 million barrels-per-day, or 1.6% of global demand, from the current level of 1.2 million. “My understanding is that they (Saudis) do (prefer it),” Iraqi Oil Minister Thamer Ghadhban said on Tuesday. On Wednesday, Ghadhban said he would support at least extending existing cuts to end-2020 from March:

That leaves Russia. Will they play along? Reuters reports, “non-OPEC Russia has yet to agree to extend or deepen cuts from its current pledge of 228,000 bpd as its companies are arguing they are finding it tough to reduce output during winter months due to very low temperatures.

A source familiar with the Russian thinking told Reuters that Moscow would likely reach a consensus with OPEC this week and just needed to iron out a few outstanding issues.

Those issues might be condensate. The big issue is Russian condensate. Condensate is very light almost gaseous oil. Russia says because they do not export it, it should not be counted as production. Yet other OPEC members have to count it, mainly because they export it.  Shale oil is condensate in many cases. This is a sticking point but should not be a deal-breaker for an extension of cuts but it could be the reason we don’t get a bigger cut.

Trade strategy may be key to ride out the crazy moves that will come with the headlines so keep in touch with our daily analysis. We had a great response to our Money Show in San Francisco! Watch for our Videos! Thanks to all. Makes sure you are getting my Daily Trade Levels! Read Phil’s energy report at Price Futures Group. Twitter: @energyphilflynn | Facebook: Phil Flynn
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