OPEC Always Disappoints Traders

In 27 days, the Organization of the Petroleum Exporting Countries will meet again in Austria. There, “The Cartel” will officially announce the future of its agreement to cut oil production.

Last year at this time, the cartel moved away from its so-called “pump-at-will” policy introduced in 2014. A policy that left the world awash in oil, with a glut that kept a bearish lid on prices for two years.

For the first half of 2017, OPEC and other producers (including Russia) agreed to cut production to 32.5 million barrels per day (bpd). And in June, they pledged to do “whatever it takes” to support oil prices. That meant extending their production cuts of 1.8 million bpd until the end of March 2018.

Everyone and their mothers want OPEC to keep their cuts going, so that the price of oil can remain higher for longer.

Keep in mind that U.S. producers aren’t restrained by the OPEC agreement. And they have been taking advantage of the situation.

One commentator suggests Big Oil loves that OPEC is complying with production cuts, believing they have been influential in keeping the price of oil supported.

That might explain why Big Oil has been rocking and rolling through third-quarter earnings season.

Total (TOT), ExxonMobil (XOM), Chevron (CVX) and BP (BP) all beat consensus expectations. Their earnings reports showed levels of revenues and profits that suggest the industry is back to normal. Most recently, Shell (RDS.A) reported its net profits rose 50% in the third quarter!

But is it all for naught? Is OPEC going to disappoint them?

No.

But they will “disappoint” traders.

There is plenty of uncertainty in OPEC’s ongoing agreement to keep production capped. Like whether or not all members will comply in a given month, for instance.

But it’s almost certain OPEC will do whatever it takes to keep the agreement alive.

If not for the sake of Big Oil, then at least for the sake of the regional financial system and its collective influence in global economics.

Bloomberg just reported that Bahrain has approached Saudi Arabia, the United Arab Emirates and maybe even Kuwait about getting some money to shore up its foreign currency reserves. These countries are each members of the Gulf Cooperation Council (GCC). With this relationship in mind, Bloomberg considers Bahrain’s relatively small economy “too big to fail.”

Hmmm …

A lack of reserves indicates Bahrain simply isn’t bringing in enough oil revenues with the price of oil where it is.

The efforts of GCC members to aid Bahrain suggests aid is better for regional credibility than if Bahrain were to pursue devaluation of its currency instead. That is, de-pegging from the U.S. dollar could create worry in the minds of investors that other GCC members and regional players are struggling to make ends meet and will need to seek similar measures.

The word is “contagion.”

And it’d surely mean added pressure on the flow of capital in the region.

If crude oil drops again, things will only be that much worse for Bahrain, et al. And that’s why OPEC probably won’t let up on its campaign to limit its crude production.

To be sure, the market already knows this. Traders have already factored this into their bets.

And that’s why I thought I should bring this to your attention.

Because when OPEC meets on Nov. 30, it’s more likely to be a sell-the-news event than an additional boost for the price of crude oil.

Brent crude broke $60 per barrel this week. WTI tested $55 per barrel; it’s up 16% in the last two months and nearly 25% since June. By the time OPEC makes its production cut extension official, crude oil could be as much as 10% higher than today.


As you might suspect, speculators in crude oil futures are already very bullish.

If oil goes higher between now and month-end, you can bet their bullish positioning will have reached an extreme – leaving the price of crude ripe for a reversal just about the time OPEC is in Vienna.

OPEC is going to deliver on an extension. They must.

But if traders don’t realize OPEC’s decision will be priced into the oil market by the end of November, they will probably be disappointed.

Do right,
JR Crooks

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Comments 3

  1. Harley Pattison November 3, 2017

    J R Crooks. Recently,you suggested that I buy UCO. I did. Now it is up 12.5%. Should I sell? Hint.

    Reply

  2. Robert Menjivar November 4, 2017

    It’s interesting how someone always have to have a negative view of everything in life. I believe it’s obvious that the individual who wrote this article has shorted the commodity. I strongly believe that’s time for the oil commodity to move to the $70-$75 range by the end of this year. That would only mean an approximately 10% – 20% from January 2017. I have seen the commodity move up and or down by 50% or more in previous years. I see the glass half full but others see it as half empty.

    Reply

  3. Bob H. November 4, 2017

    JR, the “pump at will” was called “Market Share” and invoked by Odumbo when he sent John Kerry to Saudi.
    Odumbo could NOT handle Putin so he hurt him with low oil pricing because 80% of Russia income is from oil.
    The funny part is that low price cost Saudi all it’s $850 Billion reserve + a $200 billion loan to pay their country’s
    give-away programs.
    The sad part is it cost the US 20,000 high paying jobs but Odumbo didn’t give a damn.

    Now…….. Saudi & OPEC & Russia will continue limit production but the new twist will be that they will demand the big west oil companies (US, UK, etc.) also cut production, else OPEC will “pump at will” again. That will
    be the new “WILD CARD” of future oil output!!! The key here is for a stable $70 oil for everybody.
    Saudi needs $70 oil to pay their give-away programs (Social Security – Medicare – etc.).
    Watch for late Nov. and see if I am wrong.
    Bob H.

    Reply