Oil Options Up on Strength of OPEC Tactics, but Brazil Refuses to Join the Cutbacks

Brazil could produce in excess of 5 million bpd by 2027. File Image / Pixabay

As some critics thought, Monday's dramatic crude gains as a result of the mass arrests of Saudi Arabian dignitaries is emerging as a temporary blip on the radar, as evidenced by West Texas Intermediate on Tuesday dropping 15 cents to $57.20 per barrel and Brent settling down 58 cents to $63.69.

And while Monday's gains were accompanied by predictions of crude hitting the $70 level (which in fact has become a reality for some Australian and Malaysian producers) , on Tuesday they were replaced by trepidation over rising tensions between Saudi Arabia and Iran, with the former closing all Yemeni air, sea and land crossings after a missile was fired towards Riyadh over the weekend.

Olivier Jakob, managing director for Petromatrix, said, "On the one hand, it increases the global geopolitical risk level, but it also increases the difficulty of keeping consensus within OPEC."

He is referring to the Organization of the Petroleum Exporting Countries' keenly anticipated extension of its crude output reduction strategy, whose effectiveness to date remains a question mark among analysts focused on fundamentals, and which on Tuesday hit a snag when Marcio Felix, oil and gas secretary for Brazil, said that his country has rejected an informal effort by the Saudis to join the cuts: "They are worried about the growth of production in Brazil; we have explained already that Brazil cannot do this."

Brazil, which produces 2.65 million barrels per day (bpd), by law cannot control output, and it is estimated that the South American country could double its oil production to more than 5 million bpd by 2027.

Still, the perception that OPEC has brought about the beginning of a market rebalance continues to pay dividends, partly in the form of options trading for crude oil this week jumping to the highest in five months: nearly 440,000 options contracts for WTI changed hands on Monday, the most since May, and Brent also saw its heaviest options trading since June - more than 136,000 contracts.

Meanwhile, in Vienna, Mohammad Barkindo, secretary general for OPEC, continued to spread good cheer by declaring, "Both Brent as well as the WTI benchmarks flipping into backwardation for the first time since the second half of 2014 [are among]  clear signs that rebalancing of the oil market is finally in sight.

"While the focus of many is naturally on the short term, we need to remember that the short, medium, and long terms are all intertwined: all are equally important, and none can be viewed in isolation of each other; stability today is crucial for stability tomorrow."

Monday at the height of the Saudi purge when experts were insisting that OPEC's efforts and geopolitical tensions would propel crude to the $70 mark, John Kilduff, founding partner of Again Capital, warned that rising prices "will only invite more U.S. production, along with less compliance from other OPEC members."