The Trend

OPEC: Why a Continued Oil Rally isn’t in the Cards

For the first time in eight years, OPEC agreed to cut oil output by November 2016.

Under the terms of the deal, OPEC said they would cut between 200,000 and 700,000 barrels a day from their current production of 33.2 million barrels.

In fact, it was the Saudis that threw up the white flag, softening its stance on output, as it own economy suffered under the weight of plummeting oil prices.  

For them, it was tough to ignore a $100 billion budget deficit for 2015, leaving them little choice but to cut output with hopes for economic growth. 

As a result, the price of oil rallied from a low of $43 to more than $50 a barrel.

Exxon Mobil (XOM) rallied from a near-82 low to $88.50.  Chevron jumped from $98 to $104.50.  But we don’t expect for the good times to last much longer.

In fact, you may want to begin inching into the short side of such trades, as supply continues to overwhelm demand… and as we continue to believe OPEC will not curb production at the November 2016 meeting.

There are a few reasons for this.

One, OPEC still has to flesh out the details on who will cut and by how much.  We’re well aware that the Saudis could cut up to 400,00 barrels a day, but other details are quite thin with Libya, Iran and Nigeria exempted from cuts.

In fact, countries like Iran, Libya, and Nigeria are all attempting to increase their production.  Venezuela and Algeria are in no position to cut at all. Meanwhile, one of Russia’s most influential energy giants, Rosneft has already noted it would not cap oil production as part of a deal with OPEC.

Comments like that underline just how difficult it is for Russia for get any of its oil companies to freeze or cut output, even though Vladmir Putin has said Russia was ready to join a proposed oil cap.

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It’s a nightmare scenario for oil… especially as the IEA noted that OPEC production just hit an all-time high.  Instead of curbing anything, OPEC production 33.39 million barrels in September – an increase of 220,000 barrels a day.

Sure, the Saudis trimmed output by 88,000 to 19.49 million a day, but other countries have quickly eaten up that shortfall. 

Iraq increased production to 105,000 barrels a day to 4.46 million.  Nigeria increased by 95,000 to 1.52 million.  Libya increased by 93,000 to 363,000.

But what’s now the most amusing – leading us to believe a deal is not in the cards – is a quote from OPEC secretary general, Mohammed Barkindo.

“OPEC still hasn’t decided yet whether OPEC and non-OPEC would make cuts at the same time, or OPEC would move first,” he noted.

Failure in November could easily force the price of oil to drop, as the global market sits on far too much supply.

The best way to trade the oil nightmare at this point is to keep an eye on shorting oil-related stocks, like Exxon Mobil and Chevron.  The rally can’t last if oil dies…