Published: Mon, November 28, 2016
Economy | By Melissa Porter

Oil turns negative on OPEC output cut worries

The urgency for a deal has grown even stronger since Algiers, Goldman Sachs Group Inc. said in a note Monday.

OPEC's deal faces potential setbacks from Iraq's call for it to be exempt and from countries including Iran, Libya and Nigeria whose output has been hit by sanctions or conflict and want to increase supply. Asked whether that included Iran and Iraq, he replied: "Everybody". Prices fell 21 cents to $48.03 on Tuesday. Russia's offer to freeze production at record levels - if OPEC does a deal - isn't good enough for some members who are asking for a cut. It's incredible, it's ridiculous, but it works every time.

"It is actually a rather complicated and tough situation for us, because as you know according to our plans there is production growth next year", Novak told reporters.

However, the energy minister of Russian Federation, the largest non-OPEC producer, said he hadn´t heard about such a proposal, and that OPEC´s earlier suggestion had been for members outside the cartel to reduce output by 500,000 bpd.

"Ultimately, it looks as if Saudi Arabia and its allied Gulf neighbors will reduce production on their own", analysts at Commerzbank said. "For example, back in December 2009 following the Lehman Brothers bankruptcy, the cartel succeeded in boosting oil prices from below USD40/bbl to over USD80/bbl within 12 months by cutting 2.5mn bopd from global oil markets", the analysts said. So, a successful oil deal makes good business sense for Saudi Arabia.

The 14 countries of oil producing cartel OPEC are preparing to meet on November 30.

USA oil drillers added rigs this week, as shale producers boost spending to capture forecast higher crude prices in coming months. This would bring more United States oil to the market and push down prices.

"As it stands today, the proposal pushes for production cuts from Iran and Iraq (albeit from potentially higher levels), both of whom have thus far argued for exemptions, whilst OPEC members want Russian Federation to play a larger part in the deal and join in cuts", noted Goldman Sachs on Wednesday. The IEA has warned that without production cuts, oil prices are likely to fall in 2017. "Our priority is to raise the price of a barrel of crude", said Iraq's Prime Minister Haider Al-Abadi on Wednesday.

Traders anticipate some Opec agreement, but doubts remain over whether the group would agree to a proposed cut of 4 percent to 4.5 percent under discussion.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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