A Cut, But.....Is it Enough?

By: Jon Kalchthaler / September 29, 2016

The long awaited informal OPEC meeting finally occurred yesterday and made quite a splash in the market.  Initial reports indicate a cut of somewhere in the range of 240,000 to 740,000 barrels per day across the board.  This would take production down to roughly 32.5 million bpd from the current 33.4 million bpd level.  According to a senior OPEC source, the Saudis would be among the hardest hit, with an estimated production cut of roughly 350,000 barrels per day.    This would be the first major production cut since 2008 and frankly it was only a matter of time, considering how much over production has flooded the market and driven the cost per barrel down time and time again.  In addition to the cuts, OPEC plans to appoint a task group to determine each member’s share, which will be presented at a November 30 OPEC meeting. This is a step that seems more thoroughly thought out than promises of the past.

Reaction to this news was predictable:  oil prices rallied, along with the shares of the major oil companies, and the U.S. dollar hit a nearly five month low. Crude closed yesterday $2.38 higher than Tuesday’s settle. For perspective, consider that a $3/bbl increase in the price of crude generates a $100 million/day increase in oil revenues for OPEC members.

The big question looming over the agreement, however, is whether all countries involved will actually follow through come November.  With oil being the primary economic driver of both Iran and Saudi Arabia, skepticism of this deal is looming.  Michael Tran, Director of Energy Strategy at RBC Capital Markets has been quoted saying, “The reinstalling of a system of checks and balances is a constructive outcome given that lack of output accountability is what has plagued OPEC over recent years.”  The talks between the two biggest OPEC rivals, Saudi Arabia and Iran, are encouraging considering their past, but the conventional wisdom regarding the deal seems to be “we will believe it when we see it.”

Outside of OPEC, Russia is breaking post-Soviet oil supply records by pumping 11.1 million bpd.  That is up 400,000 bpd from August.  This does not help the situation and there do not appear to be any signs of Russia slowing down.  In the United States it would appear that until we reach $50 a barrel, production will not significantly ramp up.  The world is currently oversupplied by approximately one million bpd, so the proposed OPEC cut would still leave an overhang of supply, despite actions of non-OPEC producers.  All we can do now is wait until November and see how this all plays out.

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Categories: Daily Market Update


Jon Kalchthaler

Written by

Jon Kalchthaler


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