Insider's Walkthrough on NOPEC's "Close" Deal This AM

 

Crude Oil- Head Chopper's Ball  

OPEC meets in Vienna today, and oil is rallying today on optimism of a deal after selling off hard yesterday. WTI rallied $2.70 at 6:00 am trading around $48.00. First a general observation. If markets weren't a casino before, they certainly are now. The increase of Just In Time bets on events is insane and irresponsible from where we sit. 

As to OPEC itself, Goldman handicapped a deal being agreed ot as 30% recently. We handicap a deal being honored as approaching zero. Especially in the age of Shale.

 

Saudi ARAMCO Makes the Rules

Saudis have most marketshare. This is in no small part due to their technology that enables them to have the lower cost of production than their peers, and allows them to scale up or back production by pressing a button. Meanwhile other members have to hitch more camels to the drill to get more oil out. An exaggeration, yes, but not that crazy.

 

Meeting Playbook

The meetings usually go something like this:

  1. OPEC members gripe about Saudi marketshare. 
  2. Saudi's promise to cut production and give marketshare to other members.
  3. Meeting adjourns with OPEC showing a united face to the world
  4. Other members aren't satisfied.
  5. non-opec members do not toe the line
  6. Other members then cite non-opec members as reason to  cheat.
  7. Process re-starts OR
  8. Saudi's ultimately punish by pumping more. (see 1999 for the ultimate punishment)

The Shorts are Covering Now

In our title, the Heads being chopped are the shorts. Shorts build large positions it seems at the time of these events. Then they put in their stops, and lose. The evidence is out there, and this is just a summary.

Brent crude rallied as much as 7.5 percent to $49.85 a barrel, the biggest gain since Feb. 17, as Iraqi Oil Minister Jabbar al-Luaibi said OPEC ministers were unanimous in favor of an output cut, following a breakfast meeting in the city on Wednesday. Iran Oil Minister Bijan Namdar Zanganeh said Russia, the largest non-OPEC producer, was ready to abandon its previous position and participate in curbing production.

“I am very optimistic we’re going to come with very fruitful results,” al-Luaibi said, before sitting down for the final ministerial meeting. “There will be a cut, yes, definitely."

Meanwhile zerohedge agrees with us in the most straight forward fashion:

So it sounds like OPEC "deal" will be conditional on subsequent deal with non-OPEC members in December to agree on 600kbps=NOPEC cut

Basically as a larger percentage of oil is generated by non-Opec production, it becomes incumbent to get non-opec producers to agree. The result is a Catch-22. Take Russia as an example:

RUSSIA SAID TO CONSIDER 200K B/D OIL CUT IF THERE’S OPEC DEAL: BBG

  • "Consider"= good luck with that
  • So Russia will be pleaded with to go along, yet they are not obligated to.

This means OPEC FAIL. But don't let that get in the way of a nice short covering rally. Because as we write this, Steps 1-3 of our playbook above are closing.

  • OPEC CLOSE TO CONDITIONAL DEAL
  • RUSSIA BIG PART OF CALCULUS
  • SAUDIS TO TAKE BIG CUT CONCESSION

This Morning

OPEC was said to be "close" to reaching a deal to cut supply by 1.4 mmbpd, assisted by a 600kbpd cut coming from non-OPEC nations. However, as Reuters adds, if such a deal is agreed it would be conditional on non-OPEC involvement as OPEC would need non-OPEC members, such as Russia to agree to the 600kbpd and may require another meeting as early as December.

So that is Steps  1 through 3 in our playbook above. After the shorts have covered and every nation has turned up the spigots to take advantage of the spike, there will be likely dissent and dissatisfaction when ministers return to their own countries.

"If you get this deal done, it would be huge. You remove a lot of oil from the market and you get the Russian participation," said veteran OPEC watcher and founder of Pira consultancy Gary Ross.

The deal may get done. The execution thereof is not so easy.

 

Result?

A likely outcome, then, is that OPEC will announce a 1.4mmpd conditional cut, and will also announce a subsequent meeting when a pledge to cut by Russia will also have to be ratified. Meanwhile, US shale companies are already preparing to pump more courtesy of today's oil surge even as global demand - most notably out of China - continues to decline.

Meanwhile, US Shale production is re-hiring welders and dusting off rigs as we speak, our North Dakota Bakken sources on the ground say.

Read more by Soren K.Group