As the major ministerial ‘arrivals’ begin in Vienna ahead of tomorrow’s emergency Opec meeting, the market can expect the usual deluge of comments originating from door-stepped interviews at the Intercontinental or Grand Hotel where delegation members stay.
In fact, it’s already started because the Algerian and Iranian delegations have been in town since yesterday.
Latest reports have Chakib Khelil, Opec president and Algerian Energy minister, calling for prices to be maintained at $90 per barrel to protect oil and gas project developments. This suggests they’ll be asking for a cut of at least 1m barrels per day. Khelil wants Opec to stagger those cuts so as not to inflict pain on those suffering from the global economic crisis.
He is also beckoning other non-Opec producers to join ranks and it’s what happens on this front that will really determine the effectiveness of the meeting. Dow Jones reports:
OPEC is talking to the largest non-OPEC oil exporters, Khelil said, adding that he hopes Russia, the world’s largest non-OPEC oil producer, will join the Organization of Petroleum Exporting Countries in reducing oil output to balance the oil market.
Yet the view from Moscow remains inconclusive:
MOSCOW, Oct 23 (Reuters) - Russia should play a bigger role in influencing global oil prices but it will take some time before the country can become a swing producer, Russian Energy Minister Sergei Shmatko said on Thursday. “We believe global oil market instability has created a threat to the investment plans of our companies. This is why Russia should take a more active position on the market from the point of view of price formation,” Shmatko told reporters. “But our approach differs from OPEC. We have different technologies. We are working on technology to create an oil reserve so we can quickly raise and cut production. But this is a mid-term, long-term forecast,” he said.
Analysts are divided on whether Russia can afford to join in. The state apparently needs prices above $70 per barrel to sustain its economy but can it afford not to pump? Today the cost of insuring Russia’s debt rose to record levels above 1,000bp - that’s the day after WTI oil fell below that key level. The price of Russian crude itself though - which trades at a discount to WTI - has been sub $70 for a while. Not helping matters, S&P has cut Russia’s sovereign outlook to negative from stable.
JBC Energy says that while non-Opec producers will be asked to cooperate, Russia’s reluctance to lose independence will be a key determining factor:
However, behind the scenes negotiations are going on and a well publicised joint cut is still possible, although some of the decreasese might come due to the lack of available money. Russia’s upstream sector is suffering under the limited investment conditions introduced in 2005. In its attempt to flex its muscles, Russia is playing with the idea of becoming a swing producer, a role that requires the ability to make difficult decisions.
Deputy Prime Minister Igor Sechin, who attended the last Opec meeting in September, hints if anything Russia will look to revive plans for an oil reserve to enable swing capability. Energy Intelligence reports:
A rise in Russia’s global influence appears imminent. With the price of Russian oil holding well below $70 per barrel, Russia’s top energy official, Deputy Prime Minister Igor Sechin, announced Oct. 22 that the country is reviving plans to establish an oil reserve with the intention of influencing global prices. Sechin said the Ministry of Energy is considering creating “reserve production that would allow it to work more efficiently with prices on the market.” Sechin did not explain the plan, leaving it unclear whether the ministry is considering setting aside some fields to act as flex production capacity or establishing a massive reserve holding that would absorb barrels at times of low prices.
Meanwhile, the ever-Hawkish Iranians are unsurprisingly calling for cuts of up to 2m barrels per day says Bloomberg. Many agree, if Opec is to make a difference that’s certainly the sort of figure they should be aiming for. In that case, compliance will also be critical as what Opec says is not necessarily what it does. JBC’s Johannes Benigni warns a price collapse could be imminent if Opec does too little too late (our emphasis):
JBC Energy believes between now and the end of the year Opec will need to cut production by 2 milliion b/d in order to stabilise falling oil prices. It can be expected that 1 million b/d will be cut on Friday effective from December, with a promise to do more at the December meeting, if needed. As the markets are in serious disorder, this 1 million b/d cut may be seen as too little too late and could even lead to a significant drop in prices.
With a later cut Opec risks losing a grip on a collapsing market and reducing the impact of its decision.
Opec members will be pressured to adhere fully to the group’s decision. JBC Energy expects a compliance of at least 60% among Opec members. While the call for compliance is a routine exercise at Opec meetings, this time, it will determine the faith of Opec and its ability to defend its price target.
With Saudi Arabia’s oil minister Ali al-Naimi now arrived in Vienna all eyes will be on the key swing producer. So far the minister is declining to acknowledge or endorse a cut, but it’s what he says and does that will really matter. Saudi Arabia, known for its non-compliance, will be a critical force in determining that an actual physical cut does transpire.
Whatever Opec does, the technicals do not favour any imminent turnaround says PVM’s much respected technical analyst Robin Bieber. He rightly called the top of the market in July and now says price action will continue to be demand-centric, paying little attention to anything else. He notes (see chart below):
The headlong collapse in prices seems relentless and the targets lower are well in our sights.
Petromatrix’s Olivier Jakob also warns of the massive put option bet on December WTI at $50 as a negative force on prices.
The rise of the dollar is mitigating some of the oil price loss to OPEC but it is plunging WTI deeper into the danger zone of the December Options. At 65 $/bbl there will be 710′000 net December WTI Puts in the money and that number will increase by about 25′000 contracts each 5 $/bbl lower (this compares to 328′000 contracts on the December Futures). OPEC has not created the December Option beast, yet it is what they really need to manage.
Stephen Schork of the Schork report also refers to the potential options debacle to come, especially in the context of growing US stockbuilds in both crude and gasoline despite falling demand.
…the Nymex Dec’08 $50 strike put, which expired in 24 days btw, tripled yesterday to a 69 cent premium. Over the last week or so, open interest has jumped by more than 11,000 contracts and now stands in excess of 27,000!
We will look for further weakness below here towards out 61.13 inrtaday and the $60 critical point of reference.
Interestingly Opec had originally scheduled its emergency meeting for November 18th, the day after the expiry of those options.
Related Links
The Opec defence - FT Alphaville
