The "OPEC Freeze"? -- All Talk -- Nothing Changed -- October 1, 2016

Updates

October 3, 2016: Mike Filloon weighs in on the OPEC "frreze."

October 2, 2016: oil is threatening $50, and may already be targeting $60 or above -- CNBC. It's a typically "crappy" CNBC story. The talking head says the "deal" represents a "real cut." Anyone paying attention knows a) there is no "deal"; and, b) there is no cut. In fact, the rhetoric would allow a slight increase -- and that comes on record production by Saudi Arabia the past two years. If the price of oil rises, it will come because of "emotional" investing, not investing based on fundamentals of supply and demand. 

October 2, 2016: the best thing about this Forbes article is that it reminds folks that Saudi Arabia needs $100-oil. To get $100-oil, Saudi needs:

• Iran's help 
• US environmentalists' help (regulate fracking to kill it)

October 2, 2016: The OPEC Announcement Means Squat -- WSJ

Link here.  

• "cut" not big enough
• won't happen "soon enough"
• WSJ sees the "cut" to be as much as 700,000 bopd -- I don' t know Nicole sees, but I certainly don't see any cut -- in fact, John Kemp suggests OPEC production might even increase under the "cut"
• nothing in the article that regular readers don't already know 

Original Post

John Kemp has a nice analysis of the "OPEC freeze" at this link. Some data points:

• it's a vague statement: unenforceable, and doesn't even set quotas by country
• before the annual summer surge in production (for domestic consumption), OPEC produced 32.45 million bopd 
• the "freeze": a range between 32.5 million and 33.0 million bopd
• the delta: inconsequential

The only "thing" that comes out of the hastily-called meeting was the fact that Saudi Arabia showed some flexibility and was willing to talk.

Actually, the only other "thing" that came out of this hastily-called meeting was an admission, though not explicitly stated, that Saudi had made a trillion-dollar mistake, is in deep trouble, and has now admitted as much.

Back in late 2014, when the price of oil dropped precipitously nothing had changed. There was no change in the fundamentals of supply and demand to result in a drop in prices to the extent we saw. It was simply a policy statement by the now-gone Saudi Minister of Energy that Saudi Arabia would no longer be bound by quotas. Saudi made that decision, supposedly, to protect its own market share. Others suggest Saudi Arabia was trying to "break" US shale.

Saudi's trillion-dollar mistake:

• the downturn in oil prices lasted much longer than Saudi policymakers thought likely in 2014 
• the downturn shows no sign of ending
• falling oil revenues are having a huge impact on Saudi Arabia
• Saudi Arabia foreign reserves have declined by 24%, or $182 billion, since August, 2014
• reserves declined by $53 billion in first seven months of 2016 despite big cuts in government spending and attempts to raise non-oil revenues
• Saudi Arabia still has $564 billion in cash reserves and the ability to raise a lot of cash by issuing debt but risks: losing confidence in the riyal's peg to the US dollar; a flight in capital; and, a run on currency

I have always said that whether oil is priced at $40 or $60, it won't make much difference for Saudi Arabia. From the article:

Prince Mohammed indicated earlier this year it did no matter for the kingdom whether oil prices were $30 or $70 per barrel. But in recent months officials have indicated they believe prices are unsustainably low and want them to rise.

This is John Kemp's bottom line:

The Saudis probably calculate that an increase in prices to $50-60 per barrel would bring useful extra revenue without stimulating too much extra shale production.

Saudi Arabia bases its budget on $100-oil and has done that for years. Ninety percent of Saudi's revenue comes from oil. One can safely say that $80-oil will result in Saudi Arabia coming up 20% short in their budget, year-after-year. And folks are only talking about $50-, maybe $60-oil at best.