The Chances of an OPEC Deal are Slim
When OPEC met the other month, there was a general sigh of relief.
Granted, all they did was agree to agree to potentially curb production in November.
But it was a start. And no one expected it.
Its part of the reason oil has jumped 18% from recent lows. But we don’t expect the party to last much longer. OPEC Secretary-General Mohammed Barkindo may believe the group should be able to reach a deal to curb production without too much disagreement.
“We expect that all the building blocks will be in place in a timely fashion for implementation. I am optimistic we will have a decision,” he says.
Unfortunately, it’ll take more than optimism to get this deal done.
You see the easiest part of the deal was getting every one to say they’d agree to cut.
The hard part is getting them to actually cut. OPEC must now figure out which countries should cut and by how much; then beg for them to do so.
That won’t be an easy task either.
- Iraq for example – which is now pumping 4.7 million barrels a day, higher than 4.46 million barrel estimates believes it should not be required to cut production.
- OPEC already agreed that Libya and Nigeria should be exempt, even though both have increased their daily output by 220,000 and 300,000 barrels respectively.
- Iran has steadily increased its production following sanctions, with a goal of four million barrels a day from 3.7 million in September.
Once we exclude all of that, about a third of OPEC production is exempted.
There’s also stress for non-OPEC country participation, too.
Ironically, senior officials in Iran are urging non-OPEC countries to help stabilize the oil market and boost prices. “We hope the two sides will reach agreements and the non-OPEC states and Russia will accompany members of the organization.”
Yet, Iran isn’t ready to cut itself.
And, unfortunately, just weeks after Russia said it would join in on OPEC production cuts, a Russian envoy at OPEC has said, “output cuts aren’t an option for us,” as reported by Interfax.
Despite a deal, OPEC increased production last month to the highest level in eight years.
It also just increased its forecast for 2017 non-OPEC supply growth, which points to an even bigger oil surplus by next year. Also, instead of helping last month, OPEC pumped 33.39 million barrels, up 220,000 barrels from August.
Another issue is Britain’s Buzzard oilfield, the largest oil field in the North Sea. It just recently restarted and will produce about 180,000 barrels a day.
In short, inventories around the world are at all-time highs.
While the excitement of an OPEC deal helped fuel the 18% rally, OPEC failure has the potential to send oil significantly lower than $50 a barrel, near-term. In fact, some analysts believe prices could quickly drop by $8 to $10 a barrel, as reported by the Houston Chronicle.
Look out below. But also look for some great downside opportunities in the space if OPEC fails.