Cutback Deal Uncertainty Keeps Tuesday Crude Prices in Check

Tuesday December 4, 2018

In a particularly volatile crude trading day Tuesday, optimism generated by U.S. president Donald Trump and China's president Xi Jinping agreeing to pause their trade dispute evaporated when Trump subsequently warned that the dispute would continue if their differences couldn't be resolved.

That, on top of uncertainty whether the Organization of the Petroleum Exporting Countries (OPEC) will agree to a substantial production cutback in order to avoid a global glut, caused West Texas Intermediate to settle up 30 cents to $53.25 per barrel and Brent to rise 39 cents to settle at $62.08.

Ahead of the OPEC meeting in Vienna on December 6, Khalid Al-Falih, energy minister for Saudi Arabia, told media it was too soon to be certain that the cartel and other exporters would cut production, because the terms of a deal remain unresolved.

He reiterated a proviso he made a week ago that all members of OPEC and its allies will have to come together for a cut to go ahead.

Gene McGillian, director of market research at Tradition Energy, observed, “Now we’re starting to get uncertainty on both the trade and production cut fronts and the market is giving back those gains....some of the optimism surrounding the easing of trade tensions seems to be evaporating.”

Amrita Sen, chief oil market analyst at Energy Aspects, told Bloomberg that a production cutback deal has yet to be formally announced despite rhetoric from participating countries, and volumes to be cut have also yet to be agreed upon.

She added, "I wouldn't be surprised if they [OPEC] do walk away from Vienna without a deal.....I'm not so sure we'll get a big announcement on [December] 6......and if you don't get a very clear message I think we can definitely trade $5 even $10 lower.....I wouldn't put it past us to trade into the $40s for Brent."

Sen's concerns are well founded, on the basis of Al-Falih's remarks alone: in addition to casting doubt on Tuesday on the certainty of a cutback agreement, the energy minister said that Russia - which has repeatedly expressed reluctance to participate in any production curbs -  backs output curbs “in principle.”

Bloomberg also pointed out that oil revenue dependent countries such as Nigeria, Libya, Kazakhstan, and Iraq are more inclined to either turn down any cutback deal or cheat on one if it is imposed.

Last week PVM Oil Associates, in analyzing the deep discord among OPEC members and allies, predicted that the Vienna summit would result in an agreement between Russia and Saudi Arabia to slash production, but by less than is needed to prevent a supply imbalance next year.