This alleged freeze of OPEC production seems to me like the final act of desperation on the part of these oil-producing countries to keep oil from breaking back below $40 on its own weight.
Think about it from their point of view. Once again, going into the OPEC meeting this week, we heard from the Saudis that they weren't going to cut back unless Iran cut back. Iran had been threatening to go from 3.6 million barrels a day up to 4 million with the addition of foreign capital.
The alleged deal -- and I say alleged because the Saudi oil minister Khalid al Falih specifically exempted Iran, as well as Nigeria and Libya, from the November agreement -- left the Saudis no choice but to cut back, or oil would most surely crater when these three intransigents got to their new levels. Remember, both Libya and Nigeria have seen their oil production cut by rebels.
You just need to do the math. Libya was producing 470,000 barrels per day two years ago. It had recently fallen to 292,000. Nigeria had been at 1.9 million barrels a day before the insurgents cut production to 1.4 million. The Iranians are at 3.6 million going to 4 million perhaps in a matter of months. So, OPEC was on target to produce about one million more barrels per day by year end than they did in August. So 33.2 million -- the current production -- was going to go to 34.2 million without some sort of a deal, which would most certainly have crushed the market.
Now, why do I think this deal is more talk than action, and why did oil only go to the $46 region on the deal announcement -- back to where it was before the most recent foray down to the low 40s?
Because if the oil production freeze beginning in November of 2016 is 32.5 to 33 million, and Iran, Libya and Nigeria have not agreed to freeze production, than who is going to cut back the minimum of 1.2 million barrels needed to get to the 33 million minimum target?
I don't think the Saudis will give up all that share. I don't see the Iraqis cutting back.
We haven't heard from the Russians who are going full out. The U.S. has stabilized at a production level that is 1 million barrels lower than its peak of 9.6 million -- and is about to go higher because of lower production costs.
So, the deal by itself is just chimerical. But, by saying it, OPEC managed to keep the price from plummeting -- as it was about to.
What could actually make the production freeze work? Higher demand.
It's in the interests of all producers to have oil higher. So they are going to keep up the talk.
But the physical market, where demand is stable to slightly weaker, is not going to comply without real cuts -- and we know that no country is talking about cutting production to the point that oil could get anywhere near the 33 million mark from the 34.2 million that OPEC was about to produce.
That's why I am calling it a desperate action to stop oil prices from collapsing again. They can't reveal the details because there are none.
So, don't get too excited. If you want to profit off it, go to the oil companies that have continued to lower their breakeven: Pioneer Natural Resources (PXD) , EOG Resources (EOG) , Apache (APA) , Parsley Energy (PE) , PDC Energy (PDCE) and SM Energy (SM) . They would be the beneficiaries of anything that keeps oil in the $40s, which this statement might have done.
But remember, by November we will know the target can't be hit without a big pickup in demand -- and once again crude will be fighting to stay above the $40 level, where production from the U.S. keeps coming back on line because of the 43% increase in rigs in the Permian since the country's rig-count low earlier this year.