The Oil Market Has Hit Rock Bottom: What to Expect from the Nov. 27 OPEC Meeting

Don’t look now… but oil is creeping its way back to $80.

As recently as last June, a barrel of West Texas Intermediate was nearly $110. As recently as last Wednesday, it was sinking toward $76. But as we write this morning, it’s up to $78.98.

For the last three weeks, the princes of Saudi Arabia have been making waves…

  • First, they let it be known they’d accept prices as low as $80 for the next year or two
  • Then as prices approached $80, they refused to follow their usual script when prices fall. “Cut production? Heck no, we don’t want to lose market share!”
  • And last week, Saudi Arabia announced it was cutting prices for U.S. buyers, even as it was raising them for European and Asian buyers — the better to undercut U.S. shale players.

On Thursday, Nov. 27, OPEC ministers convene in Vienna for their next big meeting.

“Over the past decade,” explains Matt Insley of our energy desk, “these jamborees are where the cartel gets together, smokes cigars and chokes the world’s supply of oil — to goose prices higher.”

But not this time: “OPEC member nations are facing the lowest price of oil they’ve seen for four years,” Matt goes on. “Many OPEC member nations are struggling. After all, countries like Venezuela, Nigeria and Ecuador are feeling a real pinch with prices well below $100 a barrel.”

Of course, so is Saudi Arabia: One of the 7,000 princes, Al-Waleed bin Talal, believes his family needs $90 oil; without it, there’s not enough government revenue rolling in to buy off the restless rubes who otherwise might revolt against the House of Saud.

Hold that thought…

“The Saudis are playing a calculated game,” says Matt.

“You see, if you want a bigger bargaining chip at the OPEC meeting, and you’re the Saudis, all you need to do is hold a lit match over the proverbial barrel of oil. (‘They’ll do it!’)

“By making strong, publicized moves in the days leading up to this meeting — saying they’ll unilaterally lower prices and increase production — the Saudis are doing nothing more than making their poker hand look better to the rest of the OPEC cartel.”

Motive? Who knows. “Maybe they want to increase their share of the OPEC quota?” Matt speculates. “Maybe they want to control the outcome of the November meeting? Truly, I’m not sure what logic the Saudis are using.”

And the logic doesn’t matter: “I’m calling the bluff,” says Matt.

“By the time we see a result from the Nov. 27 OPEC meeting, the bottom will be in for the oil market. Heck, the bottom may already be in!”

Matt says oil’s 30% tumble in four months is rather modest if you think about it: “The U.S. is bursting with oil. A Republican-controlled Congress should further ramp up U.S. oil production. Emerging markets and Europe are struggling. And the biggest OPEC producer is threatening a price war with the world.

“All said, the market is dropping some pretty large hints that this Saudi action isn’t what it’s cracked up to be. With all of the bearish news listed above, the price of oil is still rather close to $80 a barrel. Meanwhile, shale producers that pulled back on the latest Saudi announcement are already starting to recover.

“This has all the markings of a bottom in the price of crude.”


Dave Gonigam
for The Daily Reckoning

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