Just as Morgan Stanley warned, be careful getting too bearish into the OPEC meeting as OPEC's ability to engineer a short-squeeze (via well-placed but meaningless headlines) trumps any dismal fundamentals. Sure enough, WTI is surging by the most in 7 weeks to pre-Algiers levels on spurious headlines today, which builds on a reversal yesterday that started as President Obama discussed the Iran Deal.
As a reminder, here is what MS said last week… Be Careful About Getting Too Bearish Ahead of OPEC Meeting
Poor fundamentals don’t prevent headline-related price reversals. Skepticism about the ability for OPEC to execute on its Algiers agreement is warranted. A number of producers are claiming exemptions, OPEC production is rising, greater cuts may be required to achieve the top end of the range, and OPEC has a poor compliance history. Reuters also suggested that Saudi Arabia threatened to raise production, and former Saudi Energy Minister Ali Al-Naimi stated that OPEC can’t cut by itself. Nevertheless, we would be nervous being short from these levels going into the meeting despite what appears to be a poor fundamental backdrop and our downbeat outlook for 2017.
OPEC can still spook markets. Although OPEC’s actions have not matched its words (i.e. promoting the need for production restraint while quietly growing production), the cartel has become adept at talking up declining markets. The group has repeatedly made bullish announcements about OPEC intervention during periods of low liquidity (e.g. US holidays), and whenever short positions become large. Despite the fact that many investors are skeptical of OPEC’s ability to change the outlook, prices still move on these headlines. Investors have proven that they are not willing to press short positions against OPEC, even if the odds of intervention are low. In essence, this is similar to the old adage of “Don’t Fight the Fed.”
And sure enough, OPEC unleashes a slew of headlines…
- *RUSSIA, OPEC TO HOLD INFORMAL TALKS IN DOHA NOV. 17- NOV. 18
- *SAUDI ENERGY MINISTER SAID TO ATTEND DOHA TALKS THIS WEEK: RTRS
- *OPEC SEC-GEN SAID TO PLAN TALKS WITH IRAN, VENEZUELA, ECUADOR
But these headlines merely built on oil'd reversal yesterday which seemed to begin as President Obama began to discuss the Iran deal in his press conference… (via Tips)
Obama's jawboning about what Trump will do continues to inject uncertainty into the outlook for U.S. foreign policy decisions. As a consequence, it is lowering the probability that Iran will agree to a material oil production cut.
At his press conference yesterday (excerpt below), Obama said the Iran deal is working and there isn't any cheating. Just last Wednesday, however, the IAEA issued a report that Iran is storing more heavy water than its provisions allow. Some would call this cheating and an indication that Iran isn't complying. But Obama is letting it slide.
Now the question for Iran is whether or not they believe a Trump Administration will be as "understanding" as the Obama Administration. The answer is probably not, which is why Iran will continue to pump more oil and prevent a material OPEC agreement.
Obama Press Conference (Iran Q&A), 14 November 2016
President-elect Trump threatened to unravel the Iran nuclear deal that your administration worked very hard to get. What would be a concern if he alters part of it? And what would your advice be, considering that he said he’s open to advice?
And on Syria, sir, the Syrian regime now is threatening Aleppo with massive destruction. You spoke passionately a few years back about Benghazi and you warned against the killing of civilians there. Many people criticized your administration for the shortcoming of the Syria policy. Are you willing to admit any fault under your watch? And how do you act with President-elect Trump says that he won't support the Syrian opposition? Thank you.
THE PRESIDENT: Iran is a good example of the gap I think between some of the rhetoric in this town — not unique to the President-elect — and the reality. I think there was a really robust debate about the merits of the Iran deal before it was completed. And I actually was pretty proud of how our democracy processed that. It was a serious debate. I think people of goodwill were on both sides of the issue. Ultimately, we were able to persuade members of Congress and the public — at least enough of them — to support it.
At the time, the main argument against it was Iran wouldn’t abide by the deal, that they would cheat. We now have over a year of evidence that they have abided by the agreement. That's not just my opinion, it's not just people in my administration. That's the opinion of Israeli military and intelligence officers who are part of a government that vehemently opposed the deal.
So my suspicion is, is that when the President-elect comes in, and he’s consulting with his Republican colleagues on the Hill, that they will look at the facts. Because to unravel a deal that's working and preventing Iran from pursuing a nuclear weapon would be hard to explain — particularly if the alternative were to have them freed from any obligations and go ahead and pursue a weapon.
And keep in mind this is not just an international agreement between us and the Iranians; this is between the P5+1, other countries, some of our closest allies. And for us to pull out would then require us to start sanctioning those other countries in Europe or China or Russia that were still abiding by the deal because, from their perspective, Iran had done what it was supposed to do.
So it becomes more difficult I think to undo something that’s working than undo something that isn’t working. And when you’re not responsible for it, I think you can call it a terrible deal. When you are responsible for the deal and preventing Iran from getting a nuclear weapon, you’re more likely to look at the facts.
And between Obama's comments on Iran and the well-time OPEC headline, WTI has bounced back to pre-Deal to make a Deal levels…
What happens next?
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