OPEC Cutback Deal May Be a Gesture, but it Could Lessen Market Volatility: Goldman

Jeffrey Currie, head of commodities research, Goldman Sachs

The Organization of the Petroleum Exporting Countries' (OPEC) deal to reduce output may be a gesture rather than a substantial cut, but it's a crucial component in reducing market volatility, says Jeff Currie, global head of commodities research for Goldman Sachs.

Currie explained his reasoning Monday on CNBC's Halftime Report, pointing out that a cyclically stronger demand backdrop will contribute to near-term upside from a potential OPEC production cut, and adding that OPEC is now less likely to "fight a losing battle like they were before in the sense that we have in the line of sight the ability for this market to rebalance itself."

Currie went on to say that producers need less volatility in order to issue equity and debt, and this can be achieved by lowering inventories away from capacity.

He suggested that producers should also try to achieve a scenario in which spot prices trade above those of future contracts, because such backwardation will make it less likely for U.S. producers to hedge forward contracts and pump more oil, thus encroaching on OPEC market share – and upsetting the balance everyone is supposedly seeking.

Currie is optimistic that the deal will be ratified at the end of this month, and so too is noted deal booster Helima Croft, managing director and global head of commodity strategy for RBC Capital Markets: she told CNBC's Worldwide Exchange that "The tea leaves look like they're lining up now for some type of agreement come November 30."

But for the time being, volatility reigns supreme: Bloomberg on Monday reported that money managers, producers, and consumers made the biggest bets on West Texas Intermediate crude prices in nine years, amid the CBOE Crude Oil Volatility Index reaching the highest since April – a sure sign of more impending volatility.

Money managers' net-long position in WTI advanced for the first time since mid-October, climbing by 3,906 futures and options to 163,321; shorts climbed 14 percent, while longs rose 8.1 percent; WTI rose 3.9 percent to $47.49 on Monday, the highest close since October 28.

Tim Evans, an energy analyst at Citi Futures Perspective, said, "There's tension in the market, with both producers and consumers worried about what OPEC does or won't do on November 30; they want to be protected from surprising price moves."

Even if the OPEC summit is a bust, some think the cartel won't be left off the hook: Michael Lynch, president of Strategic Energy & Economic Research, told Bloomberg, "I suspect that when the OPEC meeting is over there will have been a lot more smoke than fire.

"If they don't come up with a convincing agreement, they'll be forced to revisit the issue before long."

It's unclear what would be considered convincing: the cartel's objective to reduce output from 33.24 million barrels per day (bpd) to 32.5 million bpd is a mere drop in the bucket compared to the record volumes being pumped by members, and earlier this month, BK Namdeo, head of refineries at Hindustan Petroleum Corp Ltd., called the cut "not a very appreciable amount."