Oil foretelling the OPEC truths

Oil has been a particularly interesting trade in 2016 for its volatility, its fundamentals and its ‘impact on global growth’, which has made it a key contract in any strategy.

Source: Bloomberg

Geopolitical events over the weekend will directly impact all three of these points.

The demise of a cartel

Saudi Arabia is clearly crushing OPEC and doing so systematically and methodically.

The geopolitics and its mantel as largest producer inside the cartel means it is dominating ‘negotiations’ around the production freeze accord. The market is abuzz around an interview with Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman and his remarks that all members, including Iran, must ‘cut back’ production. There has not been one proposal yet that Iran has remotely entertained.

OPEC is due to meet in Doha along with Russia to discuss production and output ‘freezes’. The deal has always appeared dead in the water despite the fact that OPEC minnow have flocked to it from Iran never entertaining the deal. The Saudi interview suggests it is not interested.

Iran reported March output numbers on Sunday, and the country has increased production of oil and gas products by 250,000 barrels a day in March. It has now surpassed 2 million barrels a day which is still 25 to 30% below pre-sanction levels – the level Iran want to reach before entertaining any form of ‘freeze’.

The Saudi-Iranian tensions have left the likes of Qatar, Kuwait and Venezuela scrambling to find a pact that would see Riyadh and Tehran entertaining a deal on 17 April. The minnows have the most to lose if OPEC fails to work as a unit.

Oil has increased 55% since the low in early February, demand has been sporadic with signs China has increased inventory stock piling and US gasoline inventories have swung to declines. However, in the past two week surpluses have been seen in both China and the US

The OPEC-Russian freeze deal has allowed oil prices to ‘stabilise’. However, the weekend’s developments further strengthen the belief that the OPEC cartel status is collapsing and that the oil price is foretelling the truth about OPEC – Saudi Arabia is king and it will make others fall into line or go by the wayside.

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