OPEC Eyes $70 Oil

Brent prices hit $60 a barrel 10 days ago and have maintained that level ever since, sparking talk that this could be the new floor under oil prices and that $70 oil in the short term is now not only in producers’ wildest dreams, but a real possibility.  

Although OPEC never officially admitted it, analysts have largely thought that pushing oil up to $60 was one of the cartel’s goals with the production cut deal.

Three weeks before OPEC’s November 30 summit in Vienna, some oil producers have already started thinking that $70 is the ‘fair price’ for oil, fairer than $60, Julian Lee, oil strategist for Bloomberg First Word, writes.

But if the cartel wants to target a higher price (which it won’t officially communicate to the market), it will likely trigger a new wave of U.S. shale production next year. More importantly, that higher oil price target may meet the resistance of Russia—the leader of the non-OPEC group of producers’ pact—which is now generally viewed as steering the OPEC/non-OPEC oil production policy, together with OPEC kingpin Saudi Arabia,

Both the Saudis and Russians have signaled that they’re willing to extend the pact beyond March 2018, lending further support to oil prices over the past few weeks.

The higher the price of oil, the stronger the temptation for OPEC members to cash in on short-term gains and cheat (even more than they do now). Currently, Saudi Arabia is over-complying with its share of the production cuts, covering for rogue members—most prominently, OPEC’s second-biggest producer, Iraq.

Saudi Arabia needs oil prices at $70 per barrel in 2018 for a budget breakeven, the International Monetary Fund (IMF) estimated last week, while Russia claims that it “can live forever” at $40 oil.

Although the November 30 meeting will discuss the production cut deal, OPEC and the Russia-led non-OPEC producers may not make or communicate a firm decision on extending the pact at that summit.

Last week, Russia’s Energy Minister Alexander Novak said that the decision would likely come at a later stage—a delay that the market would surely be displeased with.

“If we see that the market is not balancing then we’ll do it. I can give you a more specific answer if you can find me any person now who can say what the market will look like in five months. If you find a person like this, I will shake his hand,” Reuters quoted Novak as saying through a translator.

Maybe no one can correctly predict how the oil market will look like in March 2018, but the recent oil price rally made analysts and investors much more bullish than they were just a couple of months ago.

“We think both fundamental data and an improvement in trader sentiment act as strong support for a continued test of the upside for oil prices,” Paul Horsnell at Standard Chartered told the Financial Times.

Money managers had a near-record net long position in crude oil and refined products contracts as of end-October, with the net long position soaring nearly 720 million barrels since end-June to 1.022 billion barrels, just shy of the February record of 1.025 billion barrels, Reuters’ John Kemp writes. The amassed long positions mean that hedge funds and other money managers expect oil prices to continue rising, but the amount of the net longs also raises the risk of a sharp correction if and when investors decide to take profits, Kemp says.

Part of the oil price movements in the next few weeks hinges on the OPEC-Russia production deal rhetoric leading up to the November 30 meeting. While it looks like Saudi Arabia continues to convey the “whatever it takes” message, its key partner in the pact—Russia—appears to be stalling, unwilling to give U.S. shale very solid reasons to boost production next year.

“Russia appears to be trying to slow down the extension talk until there is more clarity on the outlook for balances and what they mean for prices in 2018,” consultancy Energy Aspects told the FT.

Some OPEC producers may be vying for a ‘fair price’ of above $60, but $70 oil could be a deal-breaker for Russia, a further incentive to cheat for OPEC, and an additional impetus for U.S. shale to defy skeptics.

By Tsvetana Paraskova for Oilprice.com

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