Oil: Black Gold Or Fool's Gold?

| About: The United (USO)

By Jeffrey Halley

The eyes of the world are on Vienna today as OPEC formally meets and announces whether it has made a production cut agreement or not. The direction of world crude prices will be dictated by its results.

It has seemed like a tortuous few months very long time since OPEC surprised us with a preliminary deal on cutting oil output. The initial cut was for 0.5 million barrels per day (BPD) of a total of 33.0 million bpd. Production has since risen to 33.5 bpd meaning they now have to cut 1 million bpd. Non-OPEC Russia, the largest global producer, said they would be prepared to freeze output but not cut and only if OPEC agreed on a concrete deal first. Libya and Nigeria were both excluded from the initial deal as they rebuilt production for various reasons.

Saudi Arabia initially seemed to agree that they would bear the brunt of the cuts. Iran and Iraq then asked for exclusions as well as they were rebuilding production and needed the money to fight a war. (wars to be fair, are expensive) Saudi Arabia seemed to partly acquiesce to this but insisted on using OPEC official data to monitor production and compliance. Iran and Iraq both refused to do this at which stage Saudi Arabia said no deal then. They then went further and said that maybe a cut isn't needed after all because they forecast oil demand to rise in 2017 anyway.

Russia must have been confused by then stepped aside to see if OPEC could share the toys. The US Shale industry voted with its feet, hedging furiously in the futures market on the rally to $55.00, and then with future profits locked in gleefully restarted rigs all over the Permian Basin. So as of last night, Saudi isn't budging, Russia is watching aghast from the sidelines and Iran, Iraq, Nigeria and Libya all want exclusions. About half of OPEC's major members.

If the above paragraph has left you dazed and confused then, you are not alone. It also explains a lot of the volatility in crude oil since the initial announcement. Two to four percent swing days being the norm.

But today in Vienna we shall finally have clarity. OPEC will announce a deal or no deal and the direction of oil for the next few months will most certainly be set. A no deal could see oil trading much lower as global producers adopt an every man for himself strategy and reach for the pumps. A yes deal could see a perhaps not as spectacular rally, but a welcome rally nevertheless, before oil runs into a wall of shale oil futures sellers and profit takers in the $55/60 region.

As a rough timeline, and a big thanks to my colleague Stephen Innes for this, OPEC's press conference will be around 16:00 Central European Time. The full timeline for the day can be seen here: OPEC Schedule Today. Again this is only a guideline, and I suspect subject to change. As ever I like to keep an eye on the big picture when markets get "noisy" as they certainly shall today. Looking at the daily WTI chart…WTI has support at 44.33 the 200-day moving average.

Further out, we see multiple daily highs at 51.36 and trendline support below at the 43.00 area. Intra-day one can expect oil to jump around on headlines and rumours coming out of Vienna as the day wears on.

Click to enlarge

WTI Daily

Summary

And so, at last, the day arrives when we finally see if OPEC has put aside its differences and all the kids have managed to peacefully share the toys. Today's decision will set the direction of energy prices for the near future. It remains to be seen as yet though whether OPEC has struck black gold or fool's gold.