While it appears that OPEC indeed is going to get a deal on a production cut, already the markets are questioning whether it is going to be enough. The talk is that OPEC as a cartel is going to cut production by 1 million barrels a day at their meeting November 27th. Non-OPEC producer Russia, in order to get the Saudi’s to agree to a cut, pledged to cut production by about 300,000 barrels per day. One would expect that if Russia agrees to cut then Non-OPEC members Mexico and Norway, may cut maybe 100, 000 barrels or so, bringing the estimated production cut to around 1.5 million barrels per day.
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Not a bad effort, but in a world where we are producing roughly 2 million more barrels a day then we are consuming, oil producers better hope that demand improves quickly, or they better start working on its next production cut. And it had better be a cut above the current overproduction level.
Still a cut of around 1.5 million barrels might give the market some pause before working lower. That size of a cut should put in a floor of $70 a barrel basis West Texas Intermediate for at least for a while. Whether it will hold over in the long run would then depend on the demand response from Europe and China. With China recently pumping in billions of dollars to pump up its economy and Mario Draghi hinting that they will be getting ready to do more, it is possible that we could see an uptick in demand. On top of that, winter is still ahead of us and that also could help narrow the spread between overproduction and demand.
What is clear is that Saudi Arabia is still the strongest hand in the cartel. While they have worked with the cartel to try to stop the freefall in price, it is clear they have no intention of trying to get the price to turn around. They still want to keep the pressure on the U.S. shale producer and try to discourage the surge in production.
There are three countries that won’t have to cut according to reports and they are Iraq, Iran and Libya. The reason is that these countries, because of conflicts and sanctions, have been unable to pump their quota and they are being allowed to make up for lost time. When they failed to hit their quota other OPEC and Non-OPEC members filled the void. Now it is payback time.
For Heating oil and gas the focus will turn to the Energy Information Administration (EIA) Supply report that will be realeased tomorrow. We should see good demand for distillate fuels as cold temperatures dominated trade. For gasoline it could go either way. In some areas without snow demand should be good due to low prices. In the areas with snow, not so much.
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Natural gas is looking ahead to warmer temperatures in the first part of December. Extreme volatility has engulfed the complex and the market is trying to balance the current ridiculous winter conditions with the promise that some relief might be on the way. Private forecasters are looking for temperatures to go from below normal to above normal around December 5th. After that, it is hard to tell with some staying with warmer but others saying it could be colder. In the meantime, natural gas traders better buckle up as it is going to be a wild ride. Supply is currently 6.4% below the five year average. The EIA storage report will be released tomorrow and we are looking for a 111 withdrawal.
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