Those who believe OPEC fairly represents the voices and interests of all of its members are either extremely naive or hopelessly idealistic. Perhaps an ashram is better suited to house those with such a divine leap of faith than being physical oil traders. As ever, official events like the JMMC hosted this past weekend or the infamous Vienna Oil gatherings, should be given no more credit than watching a chic-flick Netflix series; pure entertainment and pass-time. As the old adage goes "watch what Saudi Arabia does, not what they say they will do."
Over the past year, the driving force behind most of OPEC's decisions has been Saudi Arabia and its recent non-OPEC-member "bestie," Russia. This should come as no surprise, as the three largest producers of oil are Saudi Arabia, Russia and the U.S. (post Shale expansion).
Decisions to raise oil production or cut are witnessed if the above two members are in agreement, and the rest of the members just follow. The parade of quotas is presented so meticulously as though they are hard-lined and monitored. OPEC has always had a history of cheating -- quotas are more of a "guide" than an actual target.
Once this is understood, then investors and traders can understand what drives the key members' decisions in connection with budget deficits and revenue considerations. If one understands the flow of wealth earned via resources, one will understand the way the world's map is, and will be shaped going forward.
Over the weekend JMMC event, Saudis suggesting cutting production anywhere between 500,000 barrels per day up to 1,000,000 barrels per day (bpd). Very clever wording as they failed to inform the market what they produced in October to begin with.
According to secondary data released yesterday, Saudi output in October was 10.63 mbpd, higher than the 10.502 mbpd in September. Saudi Arabia is no longer complying with the quotas. The point to note is not the slight increase but the gesture itself, given they had promised to cut production by 486,000 bpd from the 10.544 mbpd level! Sound like Déjà vu? Back in June, they had already started cutting production when the official announcement was put forth at the end of June for a proposed cut.
One can theorize several possible reasons for not sticking to targets -- ranging from appeasing Trump going into the key midterm elections to them wanting to monetize on these highly lucrative prices -- to Saudi wanting to be the saviour in case Iran oil sanctions took additional oil out of the market.
It all boils down to a very simple fact: Most oil producers want a high enough price that it will generate sufficient demand at a healthy pace while not killing their money-making machine altogether. High prices, but not too high -- and not too low, given that budget deficits need to be met. That is in the interests of every one.
The market is grappling with oil prices crashing from $85 down to $70, only yesterday falling yet another 7% down to $65/bbl. One can argue that since August, when emerging markets and China were collapsing, oil's rally from $74/bbl all the way to $85/bbl in October was never "real" to begin with.
Hence it is realistically down only about 10%. The oil price always tends to overshoot both to the upside and downside. One can argue the 7% move down yesterday was perhaps a bit too aggressive. It does smell of a harsh liquidation. Next week's CFTC speculative position will probably show that.
For now, chartists are all over the oil market to gauge a level of support and resistance so that they can trade the ranges. Truth to be told, the oil market can perhaps have a sharp squeeze from here as it seems a bit oversold near term, but there is no reason to be long it for anything other than a trade, at least for now. The Oil market will likely drift over the next few weeks until real evidence of demand destruction or a pick up is seen going into the fourth quarter.
The oil market is driven by demand for its key products, and right now we are in a shoulder "weak" season. Until then, we can all become chartists and try to call the bottom.