OPEC Production Cut Deal: Prepare for Last Minute Decision

Crude Oil prices ended on a weak note on Friday, as investors prepared for OPEC’s official meeting on November 30 in Vienna, Austria. After several weeks of volatile two-sided trading, I have to conclude that the deal to curtail production will get done, but it is going to go down to the wire.

Since mid-November, traders have been optimistic that OPEC members and other non-members would agree to production cuts in order to stabilize prices. Confidence began to build throughout the latter half of the month after several key producers decided to hold informal talks to try to reach a preliminary deal before the start of the official meeting. These separate talks were designed to make good on a September pledge to curb output by roughly one-million barrels per day.

For about a week, crude oil prices rallied. There wasn’t much speculative buying, but many of the recent short-sellers were taken out, paving the way to a move by WTI crude to $49.20, its highest price since October 3.

The original proposal in September called for OPEC to trim output to between 32.5 million and 33 million barrels per day, down from an estimated 33.6 million in October.

Saudi Arabia is the catalyst behind the proposal. It has reportedly agreed to scale back its production. Most members have agreed to make cuts with Libya and Nigeria, reportedly getting exemptions. Iraq and Iran are believed to be resisting.

Libya is still rebuilding after a war and wants to have the chance to rebuild its infrastructure before freezing production. Nigeria is also rebuilding after a series of terrorist attacks on pipelines.

Iraq is pumping as much oil as it can in order to generate the cash needed to fund its war against ISIS. This leaves Iran which says it should be exempt from production cuts since it is just starting to reach production levels not seen since before U.N. sanctions were imposed several years ago.

As a start, I think OPEC will agree to allow Libya, Nigeria and Iraq to continue pumping oil at increasing levels. I think the cartel will come to the agreement that Libya and Nigeria are facing unusual circumstances and should be allowed to increase production. I also believe that the cartel will allow Iraq to continue to pump oil at current or increased levels once they become convinced about the importance of defeating ISIS.

I also believe the cartel and Iran will compromise on a production freeze rather than a production cut.

So in my opinion, the deal will get done, but investors are going to have to wait until the last minute on November 30 before the news comes out. Whether the plan to cut production works in curtailing production and stabilizing prices is another matter, subject to another opinion piece. The current price action suggests that traders are also willing to take it one step at a time.