Opec cuts, but can it deliver?29 september 2016, 14:56
The pump-and-dump strategy introduced by Saudi Arabia in November 2014 was called off Wednesday when Opec members meeting in Algiers decided to cut production by up to 700,000 barrels/day with the allocation expected to be agreed at the next official Opec meeting on November 30.
This is the first production cut in eight years has been taken in order to support the rebalancing process which had almost come to a halt as several Opec members and Russia continued to ramp up production in recent months.
The decision was taken to establish a floor under the market with the upside limited until the global overhang of supply start to show signs of being reduced.
Several questions were left unanswered:
1) Who is going to cut given some members including Nigeria, Libya and not least Iran are expected to be excluded ?
2) Who will provide the barrel-for-barrel reduction of the potential increase coming from Nigeria and Libya?
3) Will they use independent estimates on production or the individual countries own numbers which often tend to be higher?
4) When will the cuts come into effect? If not agreed before November 30 the impact is not likely to be felt before January the earliest.
Some of these questions point to Saudi Arabia which seems to be the one that need to provide most of the cuts. But producing fewer barrels at a higher price is likely a price well worth paying for the kingdom. This not least given it normally cuts production this time of year.
Hedge funds increased their gross-short by 50% last week ahead of this week's roller-coaster price action. A continuation of the rally from here depends to a certain extent of how much further position reductions needs to be done.
Brent crude oil is still below the recent peak which occurred when the Saudi energy minister back in August first raised the likelihood of a production freeze.
Brent crude spiked 6% overnight but is still shy of the August
peak after the Saudis verbally intervened on the state of the market
Opec and the oil price have both been boosted by the fact that an increasingly dysfunctional cartel once again has shown the ability to agree on something.
US and other high cost producers will also have cheered this decision considering the potential it provides for stabilizing and eventually boosting production.
The devil's in the details. This was the easy decision compared with the hard bargaining that now lies ahead of the November 30 meeting.
If Russia joins, we have a proper deal which could propel oil back to the July level but unlikely higher at this stage.
Our $45/barrel to low $50s/b is our preferred range for the coming months and that has not altered on this announcement with so many key details still to be worked out.