Monday, November 28, 2016

OPEC Poised for Oil Production Cut on Wednesday

The 171st Meeting of the OPEC Conference is scheduled to meet this Wednesday, 30 November, in Vienna, Austria.  It's widely anticipated that OPEC (Organization of Petroleum Exporting Countries) will agree to cut oil production by at least 2.5% in their 10:00 AM EST announcement.  OPEC last cut oil production in August, 2008.

Until this afternoon, the largest wild-card in the equation was Iraq, however they announced today that the fourth largest oil exporter in the world will cooperate with OPEC and called for a 4.546 million barrels per day reduction in production.  Iran is similarly considering a cap on production, although they have yet to announce any projected levels.

Oil spiked on the news from Iraq, however it settled down before the close, today as the news was digested by commodity traders.  As of this writing, WTI Crude is trading at 46.92 and Brent Crude is trading at 48.02.

It's important to note that four of the top ten oil producers in the world - Russia, the US, China, and Canada - are not members of the OPEC cartel.  None have signaled either support or opposition to the OPEC plan, although all would benefit from a production cut accompanied by higher oil prices in 2017.

Ironically, the initial call for a cut in production came from Saudi Arabia, the world's largest producer.  Starting in 2014, Saudi Arabia increased production dramatically, driving oil prices from their $100 per bbl range down to as low as $26 per bbl.  Their intent at the time was to cripple the US shale market by driving price below a profitable level for the hydraulic fracturing wells used in the shale fields.  While the price cuts did initially cripple the shale industry, price eventually stabilized in the mid-40s, thus mitigating the impact.  Saudi wells could absorb the short-term impact on profitability, however as we head into the fourth year of abnormally low prices, the impact is now being felt across the Saudi Arabian economy.

Analyst expect at least a 2.5% production cut on Wednesday.  This will likely cause significant volatility in the oil market for the short term, and we can expect to see an overreaction to the upside until the actual impact of the cut is determined.  With refining currently at or near capacity, it's likely that the cuts will have little end-user impact over the long term, and we can expect oil to stabilize in the low to mid 50s in 2017.  That's still lower than it should be, however it's far better for the economy as a whole than the excessively low range we saw in 2015 and parts of 2016.

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