OPEC Deal Expected, but Doubts of Its Efficacy Cause Oil Prices to Drop

Widespread indications suggest next week's OPEC summit will be a bust.

Ever dependent on rumours to make decisions, trader reaction to new doubts about the Organization of the Petroleum Exporting Countries (OPEC) agreeing to a big enough production cut next week caused Brent on Wednesday to settle down 17 cents at $48.95 per barrel and West Texas Intermediate crude oil futures to settle down 7 cents at $47.96 a barrel.

Although the deal to a collective production cut of between 32.5 million and 33 million barrels per day has been roundly criticized as too minuscule to be helpful to an over-saturated market and unlikely to be closed due to so many members refusing to play ball, oil prices experienced a minor rally earlier this week based on nothing more than assurances from key OPEC representatives and energy ministers that there would be a happy outcome when members convene on November 30 in Vienna.

Tariq Zahir, an analyst at Tyche Capital Advisors, echoed the sentiments of his doubtful colleagues by stating, "There's going to be some cut, but is Saudi Arabia really going to take the lion's share of the cut?"

Stewart Glickman, head of energy research at S&P Capital IQ, said, "There are three possible outcomes:[OPEC] could make an actual cut, freeze production, or the meeting could fall apart.

"The only one that will have an impact on the oil market is if they make a cut, and a widespread one, not just the Saudis doing all the work."

Indeed, about two thirds of the participants in the latest CNBC Oil Survey said if OPEC agrees to cut production, it will have to do more than what was agreed to in September in order to have an impact on prices.

Meanwhile, even something as influential to prices as Energy Information Administration data showing that crude stockpiles fell 1.26 million barrels last week will take second place to the days leading up to the Vienna meeting, says Adam Wise, managing director–oil & gas for John Hancock: "The reversal of the three-week trend of inventory builds is a lot less important than whether OPEC can get Iran and Iraq to take part in a deal."

And on that score, despite the persistent rhetoric coming from the cartel, it's questionable whether the two countries are serious about making a meaningful contribution in Vienna: CNBC notes that they along with Saudi Arabia "have been grabbing for more foreign business with both hands," with crude oil exports from Iraq alone growing 15.1 percent in October from a year ago.

Plus, with hawkish Donald Trump as the new U.S. president, "There's just no way the Iranians are going to agree to this," John Kilduff, founding partner for Again Capital, told CNBC, adding, "I think they see a horizon, potentially, where their oil production and exports get disrupted again by the new Trump administration, ... so why would they agree to any sort of cut at all right now?"

Worse still, the leading producers in Russia, which has positioned itself as a non-member potentially agreeing to participate in the OPEC deal, have not yet agreed to enact any cuts, sources told Reuters on Wednesday.

Even the most optimistic OPEC observers aren't expecting much improvement in market performance in the near future: Phillip Streible, senior market strategist at RJO Futures, earlier this week predicted oil rising to $50 next week but doesn't see it climbing much higher than that due to the likelihood of the U.S. federal government raising rates "and curbing optimism."