Live From Vienna: OPEC Beheaded!

Saudi Arabia’s fellow oil producers have finally lost patience with the Kingdom’s shenanigans.

Or have they?

The Saudis made a huge gamble as the kingdom tried to bluff its way through another round of negotiations to cut oil production. Now, they have to deal with the fallout as Iran (and Iraq) attempt to stand up to their warnings.

“For decades, Saudi Arabia has had its way at OPEC. All of a sudden the position has turned: Riyadh finds its power waning against a resurgent Iran and Iraq,” Bloomberg reports.

The Organization of Petroleum Exporting Countries ministers are in Vienna for a meeting today. As recently as last night, Iran’s minister said he wasn’t backing down and agreeing to cuts to please the House of Saud.

The revelation sent crude into a tailspin. Oil tumbled almost 4% yesterday, erasing Monday’s gains.

It looked liked crude had officially lost all of the positive momentum it tried to reclaim last week. Oil was fading fast—and it hadn’t come anywhere close to its October highs north of $50 ever since OPEC kicked the can at its previous meeting.

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But an eleventh-hour deal appeared on the table while we were sleeping that will have serious implications on the world’s energy markets for months to come. In a surprise twist, OPEC is getting its act together. According to multiple sources, a deal is in the works today that will lead to a production cut… and higher oil prices.

“OPEC is very close to a deal to cut supply by 1.4 million barrels a day, according to a delegate, who said the agreement would also include reduction in output of 600,000 barrels a day by non-OPEC producers,” Bloomberg reports. “That would mean the group’s three biggest producers — Saudi Arabia, Iran and Iraq — have resolved their differences over how to share the burden of a plan to reduce supply for the first time since 2008.”

The surprise announcement shot crude higher by as much as 8% early this morning. That erases yesterday’s drop and then some.

So how the heck did it all come to this?

Here’s a quick refresher: OPEC officials met at the very end of October, yet could not come to terms on production. As of last night, it looked like everyone was back to square one. Saudi Arabian energy minister and Saudi Aramco chairman Khalid Al-Falih has one again tried to steer the conversation in his favor. He insisted that oil prices would stabilize next year without OPEC’s help. Earlier this month, Al-Falih also said that demand for oil will continue to rise despite the world’s efforts to combat climate change.

Of course, crude rolling over again spells big trouble for Saudi Arabia. And the outcome of this week’s talks is considered by many folks to be make-or-break for the Saudis.

“If OPEC does not come up with a credible agreement to cut production on Wednesday oil prices will end the year below $40 a barrel and be chasing down $30 a barrel early next year,” said PVM Group’s David Hufton.

Earlier this year, we told you how oil has been consistently victimized by whipsaw market action. In June, oil prices quickly jumped above $50 a barrel for the first time in nearly a year. U.S. stockpiles were down and China demand came in stronger than anticipated. Both of these factors helped push oil over the hump. Crude even managed to top $51.

But these gains were short lived. As it turns out, the oil bears were just taking a quick nap. After topping out, oil prices fell for six straight days. It was the longest bearish run for oil since early 2016 when prices plummeted below $30 a barrel.

If this production cut does come through this morning as the market anticipates, the consequences are huge. Not only will OPEC have saved itself for now—but the chances at a sustained oil rally will increase substantially.

We’ll keep a close eye on how oil names react to the news today. A fresh trade on a resurgent energy sector could end up on the table soon…

Sincerely,

Greg Guenthner
for The Daily Reckoning

The Daily Reckoning