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Saudis Withdraw From Non-OPEC Meeting, But Odds For Deal Are Still Good

Oil prices fell on Friday morning after some bearish comments of Saudi Arabia but the odds of a substantial OPEC deal seem to have improved now Iraq is on board

 

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Friday, November 25, 2016

Oil prices held steady just below $50 per barrel at the end of the week, before falling back a bit as a result of bearish Saudi rhetoric. Iraq added even more momentum to the market in the lead up to the Vienna summit, agreeing to shoulder some of the burden for the cartel’s production cuts. After resisting for weeks, Iraq’s Prime Minister said that his country will participate. “Iraq will cut its output to preserve prices,” Al-Abadi told reporters in Baghdad on November 23. Iraq was one of the largest stumbling blocks to a deal, so things are looking pretty good for some sort of agreement next week. If they succeed, the deal would take effect in January.

OPEC by the numbers. To fall into the range that OPEC set out in Algiers – between 32.5 and 33.0 million barrels per day – OPEC will need to cut between 600,000 and 1.1 million barrels per day. Taking the midpoint, or about 900,000 barrels per day, would go a long way to erasing the global supply surplus.

However, Saudi Arabia is reportedly on board with an aggressive approach: Making cuts of 1.1 mb/d in order to take output down to 32.5 mb/d, plus asking Russia and other non-OPEC countries to contribute another 500,000 to 600,000 barrels per day in reductions. If that were to occur, the agreement could take 1.6 percent of global supplies off the market. OPEC has surprised and disappointed the oil markets many times in the past two years, so nothing should be taken for granted. But if a deal is signed, oil prices could rise substantially. A survey of analysts conducted by The Wall Street Journal finds that oil watchers think prices would rise to $55 per barrel if OPEC succeeds, but could fall to $40 per barrel or less if they don’t. Needless to say, the stakes are high.

Related: Tesla’s Solar Roof Market: What’s The Potential?

Rising oil prices a boost to U.S. shale. IEA executive director Fatih Birol sees oil prices climbing to about $60 per barrel if OPEC succeeds in cutting output. That would be a boon to OPEC but it could also provide a spark to U.S. shale, which is already holding up with oil prices below $50 per barrel. Production from the Permian basin in particular will continue to soar if oil prices rise. Already very profitable at today’s prices, the Permian has captured a growing share of global oil investment this year. If output from the U.S. rises, the IEA says the OPEC deal could lead to another downturn in prices within nine months to a year. In other words, the OPEC deal may only provide a short-term boost to prices, which will lead to higher output and another downturn.

Dollar continues to climb. The markets are expecting a near 100 percent chance that U.S. Fed Chair Janet Yellen hikes interest rates in December, with further action expected next year. That is pushing up the value of the dollar and leading to losses for emerging market currencies around the world. The dollar is at its strongest level against a basket of other currencies since 2003, forcing central banks around the world to respond to protect the value of their currencies. The stronger dollar is providing a check on rising commodity prices – oil fell on Friday because of gains for the greenback.

Related: Japan Is Aggressively Buying Up Oil And Gas Around The World

China provides aid to Venezuela, takes more oil. Cash-strapped Venezuela turned to China for financial assistance, and China agreed to invest $2.2 billion in the South American OPEC member in exchange for a higher take of its oil production. Due to past investments, Venezuela has been sending some 550,000 barrels per day to China. Between 2007 and 2015 China poured about $65 billion into Venezuela and has been paid back in oil. After the latest agreement is signed in December, China will have the rights to 800,000 barrels per day of Venezuelan oil. The Chinese investment could help stabilize Venezuela’s output by upgrading infrastructure.

Peak oil demand. The Economist added its voice to the growing chorus regarding the prospect of a peak in oil demand. The magazine argues that the world needs to prepare for a post-oil age, even if that era is not yet upon us. Instead of a sharp decline in consumption, The Economist says that the end of oil will be more gradual, and largely due to a shift in investment away from fossil fuels and into alternatives.

OPEC cuts could hurt tanker industry. Fewer tankers filling up and departing from the Middle East will put a dent in the business for oil tankers. Bloomberg estimates that the proposed cuts from OPEC would reduce the equivalent of five supertankers’ worth of crude oil. This comes at a time that the tanker business is struggling from an expanding tanker fleet, which is putting pressure on day rates. Plus, higher oil prices could slightly slow crude oil demand, which could further reduce oil trade.

EPA increases biofuel requirement. The U.S. EPA released final numbers for its 2017 biofuel mandate, handing the oil industry a huge loss. The EPA will require 19.28 billion gallons of biofuels to be blended into the U.S. fuel supply, much higher than the 18.8 billion gallons the agency proposed in May. The figures will require 15 billion gallons of corn-based ethanol and 4.28 billion gallons of more advanced biofuels. The battle over the renewable fuels mandate is one that pits powerful Midwestern farmers against the oil industry.

By Evan Kelly of Oilprice.com

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