OPEC “Deal” Boosts Risk; We Call False Alarm

Well, what can you say?

OPEC hit everybody with a haymaker. Here’s the bullet point summary via Bloomberg:

“WTI trades near $45/bbl as market focuses on meeting between OPEC ministers in Algiers. Algeria proposes 796k b/d OPEC cut at meeting.”

  • OPEC’s strategy of pushing out high-cost competitors is at a “turning point” as members max out production and U.S. shale proves more resilient than expected, Antoine Halff, director of Global Oil Markets program at Columbia University, tells New York energy conference.

  • “Saudis face “difficult time” keeping up production increases and Venezuela, Nigeria output may also fall, Halff tells S&P Platts Benposium East 2016 conference.”

  • “BofA Merrill sees Brent oil moving between $52 and $69 per barrel in 2017 with $61 as “sweet spot,” Max Denery, bank’s vice-president of commodities research, tells conference”

  • “Wide range in projection due to uncertainty about global demand growth and suppliers including Nigeria and Libya: Denery”

  • “WTI to reach $53 by end of 2017, with Brent “a few dollars higher": Trey Cowan, S&P Global Platt’s RigData analyst”

  • OPEC agreed to cut production by nearly 750k b/d from August levels to 32.5m b/d, according to a delegate at informal mtg in Algiers who asked not to be identified by name.

  • Oil prices rallied, Nov. Brent rising as high as $48.96/bbl; most analysts had predicted no change in policy

  • Supply cut would be 1st in 8 years

  • Overall volume of cuts is similar to an earlier Algerian proposal that OPEC cut production by 796k b/d from August levels, with Iran, Libya, Nigeria receiving special allocations

  • Decision is “clearly bullish” and may herald Saudis returning to role of oil mkt management, says Mike Wittner, head of oil-market research at Societe Generale in New York

  • Agreement comes amid a backdrop of rising production from OPEC members such as Iraq, Libya and non-OPEC Russia, and shows group has overcome differences between key members Saudi Arabia and Iran that scuppered previous attempt in April to freeze production

  • Mkt waiting on more detail of accord though return to OPEC system of production checks is “very constructive,” says Michael Tran, a commodities strategist at RBC Capital Markets

  • Click here to see OPEC’s Aug. production levels according to secondary sources used by OPEC; click here for Bloomberg ests.

Here’s the result for crude:

That’s certainly great because it lifted risk into the close.

Just look at the headlines:

So that’s CNBC. Hrer’s Citi:

“Oil-related everything is gaining as market waits for statement from OPEC on possible agreement to agree that production needs to be cut.”

“Oil-linked currencies jump and energy bond spreads tighten as oil jumps around 4%. Energy bonds are 3-7bp tighter with MLPs around 2-3bp better. Some flow there. Petrobras jumped around 1/2 point.”

“High Yield energy names up 1- 1.5 points, but the desk says not a ton is going on. HYG, meanwhile, is at the highs of the day after inflow of around $90 million yesterday.”

“WTI up $2 to $46.66, that's off earlier highs as market attempts to digest what this really means. WSJ says OPEC agreed to a committee, which is to study how cuts should occur and report findings at next meeting Nov. 30.”

“Given recent history, sure makes for some caution here.”

Ummm.. yeah. It sure does. And frankly, we’re not buying it for a second.

This is pure political wrangling between the Saudis and Iran and that’s subject to change at the drop of a dime.

One “little” thing goes wrong in Syria or Yemen and this whole “agreement” is over. And trust us, there are a lot of “little” things that could go wrong in Syria and Yemen, not to mention Iraq where the Sunni minority has lost control of the government.

But make no mistake, we’re not trying to be downers here. Gains are gains. Doesn’t really matter how they came about. But this a false start for oil.

So if that’s what you’re betting on to continue the rally, find something else. Because if you think you can trust the Sunni/Shiite divide to support your portfolio, well then we suggest you look at a couple of centuries of history.

No need for any Street commentary (because we’ve got it), more important is hundreds of years of sectarian violence.

Spread the love

Comments are closed.