source: Stock Photo
I know the temptation investors are going to have to make a quick killing in relationship to the OPEC meeting, but unless it's a little play money to have fun with, I would stay away from taking a serious position in the play.
Not only is there uncertainty as to the end result of the meeting, but the endless stream of news stories covering every possibility and nuance associated with the deal results in quick and huge swings in the price of oil, and the future outlook accompanying whatever decision is made.
Another factor is if the decision is to make some type of cut, there will have to be significant details released in regard to the key players underwriting the cut, otherwise the market will give a collective yawn and go back to business as usual, which means look at market forces and not temporary, artificial interference from OPEC.
To me OPEC is not longer the swing producer in the world, so what it does now will have little long-term effect on the oil market. But for the short term, by which I mean 4 to 6 months, it's likely to support the price of oil if it does in fact provide a visible cut that is able to be monitored and believed.
While I'm skeptical of anything associated with OPEC, and don't believe the cartel has integrity or is in any way unified in purpose, it's probably going to make some type of last minute deal that will "surprise" the market once again, because the proposed deal appears to be moving in a negative direction, and the current but fickle consensus is there is unlikely one to be made.
That is setting up oil to explode upward if this is all just theatrics being used to propel oil higher than the market would normally award it with. It could also provide support further out if the deal is perceived to be deep enough to rapidly rebalance the oil market; that will at least be the immediate effect of the announcement.
Again, transparent details will be needed to ensure long-term support for oil, if the overall cuts are as deep as Saudi Arabia and OPEC have been looking for and communicated.
Is the reported tension in OPEC orchestrated or real?
It's not unusual to have the members of OPEC bicker with one another; sometimes in a very public manner. But this time around with so much at stake, I'm starting to get a little suspicious of the drama portrayed as coming for OPEC, and even at times from non-OPEC member Russia, which is considered a crucial piece of the puzzle in regard to whether or not the cartel will go forth with a cut or not.
Even Russia has displayed internal strife and disagreement from different representatives of its major oil companies, as interests of each company are weighed against what is perceived as the greater good for the oil market.
As for OPEC, the diversity of opinion and commitment to the deal, sometimes apparently changing at a moment's notice, seems to be a happening too many times for me to feel comfortable with it as being based in reality. It's possible they're that fickle, but I'm starting to think it is scripted releases to the press to create the sense of uncertainty.
If most of the market is made to think the deal is falling apart, and then in the meeting they suddenly all come together in unison, it will create a sense of surprise to many investors and the market, which will as mentioned earlier, push the price of oil up much more than it would have been awarded with otherwise.
That will happen immediately if I'm correct in my assessment. If the deal is transparent and deep, it could provide a sustainably higher ceiling than the market has been looking for.
The caveat, as always, is if the cut in output is deep and real, and the price of oil shoots up higher than expected, U.S. shale producers will quickly complete hundreds of wells and flood the market with more oil. That means the impact of even the best deal will be temporary. I think it would last a couple of months or so because it'll take that long for the wells to be completed and oil to be brought to market.
Now I'm not saying there aren't some real and important differences within OPEC. That's especially true with Saudi Arabia and Iran. The overall reports of endless squabbling and inability to reach agreement on anything is what I'm challenging; specifically if it's really being orchestrated by the cartel to position itself to surprise the market with its announcement.
What to expect
I recently went into detail on what the market should look for coming out of the OPEC meeting, and that is the strong probability of an announcement of a significant cut, but where the details of that cut, as far as it relates to individual countries, are vague.
The reason that would happen is so the market can't accurately measure whether or not member states are complying with the deal.
My thought there is details are lacking, it's highly probable the boost in oil would be very short term, and the market would quickly settle back into focusing on the fundamentals in general, rather than the meaningless talk coming out of OPEC.
The only thing I see that could be a long-term catalysts for supporting the price of oil is if Russia surprisingly agrees to make a significant production cut itself, which when included with an OPEC cut, would be considered as at least somewhat valid by the market. It would of course have to be monitored as to its veracity, but it would definitely cause the price of oil to soar.
When all is said and done, investors should be extremely resistant to the temptation to throw a lot of money at this proposed cut. At this time there is only a 50/50 chance of success either way, and even if some of you believe you've got it figured out - you don't.
I know the general consensus is that there will be a deal made, and that's probably going to happen. But even under that scenario it's the details of the deal, or lack of them, that is the most important part of the announcement, and whatever the higher price of oil may give investors very quickly, can just as quickly take away if the deal is deemed to be more for show than for actual cutting back on output.
Worse of course is if the cartel isn't able to reach a deal. Whatever investors through at the expected upside is going to be lost in that case.
Like I said, if investors want to use some of their play money to take a run at making a quick and fast profit, that's fine, but to take serious money and throw it at this proposed deal is to risk it all.
Of course we'll hear about some that did take that risk and win not too long after the decision by OPEC is announced, but it'll be based upon chance alone, not some hidden insight they may suggest they had when taking a position.
If I was going to take a position, I would do so based upon the stronger possibility of a production cut being made, and do it in a company I already have plans to hold for the long-term. That way it won't really matter what direction oil takes for upstream companies that have strong balance sheets and low-cost production.
What could happen there would be to enjoy a nice upward move that could be sold off and the profits taken, or it could be considered just adding to the position you already hold while riding it out for the long term. That's the safest play if you want to take a position.
The absolute safest is to ignore the hoopla and stay on the sidelines. That's what I'm going to do.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.