Dennis Gartman
September 30, 2016

OPEC's Agreement: Will they really cut production?

CRUDE OIL CONTINUES QUIETLY TO ADVANCE in the aftermath of the “successful” series of meetings that took place in Algiers earlier this week during and at the end of which a sort-of agreement was forged that shall freeze crude oil production somewhere around 32.5-33.0 million bpd. Presently, OPEC is producing crude at or near to 33.24 million bpd. The problem with the agreement is that it is non-binding and that the real quotas to be imposed upon OPEC’s member countries shall not be hashed-out until the official semi-annual meeting in Vienna in late November.

Already Iraq’s Oil Minister, Mr. Jabar Ali al-Luaibi, has taken the agreement to task, noting that the figures for production assigned to Iraq are wrong and “do not represent our actual production.” Mr. al-Luaibi made it clear that unless there is a material adjustment made in Iraq’s production numbers used in the current agreement then Iraq cannot and will not “accept the agreement” and will “ask for alternatives.” The ink has not even dried on the paper and already there is very clear and very material dissention.

Iraqi crude oil production has been on a tear to the upside in recent years, having increased by nearly 2.0 million bpd over the course of the past six years and rising 1.0 million/day over the course of the past two years alone. That trend shall continue… or would if there were no “agreement” in place… for Iraq needs revenues as badly as any of the OPEC members.

Further, the proposed cut by the Saudis in their daily production of crude from 10.7 million bpd to 10.2 million in November is a bit of a façade, for the Saudis have been producing 10.7 million/day recently because the demand for air-conditioning in the summer there is of course extra-ordinary. As that demand recedes into the autumn and winter as temperatures moderate, Saudi oil production would be falling too. Always has and always will.

In the end, it “boils down” to whether one is to believe that suddenly OPEC’s members will actually abide by the agreement… which is of course possible… or whether the cartel’s members will revert to form and “Cheat like mad-men.” In the past, betting upon the latter has been the far-better course of betting action; betting on the former has been a quagmire of disappointment.

Who are the winners then in light of the “agreement” forged in Algiers? They are Texas, North Dakota and Oklahoma primarily… because the swift rise in prices coupled with the still rather large contango has driven one year forward WTI well above $50/barrel… indeed the one year forward it now nearing $52/barrel… and that is a nicely profitable level for good frackers whose bankers are almost demanding that hedges be put into place on any new wells being drilled or upon any previously uncompleted wells that had been drilled and are now being brought into fully-fledged production.





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