Article / 29 September 2016 at 5:48 GMT

Opec cuts, but can it deliver?

Head of Commodity Strategy / Saxo Bank
Denmark
  • Saudi Arabia calls off pump-and-dump strategy after agreeing oil cut deal
  • Deal is first Opec cut in production since 2008
  • Details on deal need to be sorted out in run up to November 30 Opec meeting
  • Nigeria, Libya and Iran expected to gain exemptions
  • Impact unlikely to be felt until January 2017 at the earliest
  • Forecast on short-to-mid-term for oil still to be capped in low $50s/barrel


Opec


The devil in the detail will need to be sorted out by the November 30 Opec meeting
and that will see feverish negotiations over the next two months. Photo: iStock


By Ole Hansen

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
v

Source: SaxoTraderGO

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.

— Edited by Martin O'Rourke

Ole Hansen is head of commodities strategy at Saxo Bank
29 September
John Roberti John Roberti
Dear Ole thnks a lot for btghis weel thouht of summary of the resent uncertainyties arisoing from uyestezrday dea
29 September
John Roberti John Roberti
Dear Ole, thanks a lot for this well thought of summary of the present uncertainties arising from yesterday deal on possible oil cut.. It remains to be seen, in view of FMI (and the like) economic projections, if the oil demand will really pick up next year while, presently, it appears fairly improbable! This could render the range of 45-50 uncertain as well in the future.
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