Production Cuts and the OPEC Act

11/30/2020 10:00 am EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

The world is waiting on OPEC Plus to try to hammer out a deal on extending production cuts and basically to get their act together, says Phil Flynn of the PRICE Futures Group.

While the decision to extend cuts for at least three months should be a no-brainer, greed, ego, and shortsightedness seem to control some group members.

The oil market has widely priced in a three-month extension while holding out hope of a more dramatic OPEC Plus surprise. Even Vladimir Putin plays it coy by saying that he has no plans to talk to Saudi Arabia ahead of the OPEC Plus meeting. Yet Kremlin spokesman Peskov reportedly says that differences over the future of production cuts are now less severe than in spring 2020. Still, the UAE, Kazakhstan, and others seem to be gumming up the works.

Reuters reports that after an initial round of talks on Sunday ahead of crucial meetings on Monday and Tuesday, the group is now considering rolling over existing cuts of 7.7 million barrels per day, or around 8% of the global market into the first months of 2021, sources have said. Preliminary consultations on Sunday between the key ministers, including OPEC’s leader Saudi Arabia and Russia, had not reached a compromise on the rollover duration. Sources have said talks were now focusing on extending cuts by three to four months or a gradual increase in output. Ideas of deeper cuts or a six-month rollover were much less likely, the sources said. “There is no consensus as yet,” one source said. If the group fails to extend cuts, the oil market will fall. Already the dispute is weighing on prices. 

Yet good vaccine news may still offer support. Reports say that Moderna (MRNA) will submit their Covid vaccine for emergency approval today in the US and the UK. The oil market will get support from re-opening expectations and the fact that we see continuing strong demand in China. Travel for the Golden Week is reportedly high.

Natural gas is still struggling. Andrew Weissman of EBW Analytics reports that in November, temperatures are expected to be much cooler during the first half of December. While the pattern is likely to be variable, on average, temperatures are likely to be colder than the ten-year norm but warmer than the 30-year average. This should strengthen natural gas cash prices considerably, reducing the downside risk for futures. Near-term, however, the ability of the forward curve to rise further will depend on day-to-day degree-day swings and the evolving weather forecast for mid-to-late December. We want to buy the winter calls.

Learn more about Phil Flynn by visiting Price Futures Group.

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