Will the Saudis Break Ranks with OPEC? And Will It Matter to Oil Pricing?

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Includes: DBO, USO
by: David Enke

OPEC's recent decision to cut production may not have the impact that is usually expected (see NY Times article). Reports are, that Saudi Arabian officials have assured world markets that they would ignore their own cartel members and continue to pump oil.

While agreeing with the recent decision of OPEC to cut production, the Saudis are concerned that higher oil prices will not help the world economy, possibly causing a recession that would not only cause oil prices to collapse even further, but also speed-up the development of alternative energy sources. The 13 nations in OPEC control roughly 40-45 percent of the world's oil production (and hold roughly two-thirds of reserves), yet some large non-OPEC players in the space, such as OECD members and Russia, produce approximately 24 percent and 15 percent, respectively.

The impact of the OPEC decision, especially when one of its members may be breaking ranks, could be less than might be expected, but with close to half of all production their impact is still worth paying attention to. Nonetheless, when an asset is selling-off, even on good (or at least bullish) news, then this also must be noticed.

Oil is nearing the psychological $100 a barrel level once again. If this level is broken with any conviction, even in the face of possible production cuts, this would certainly be an interesting development for the entire market. Further selling pressure seems to be more of a reality at the moment, especially given the de-leveraging of commodity assets by various pension and hedge funds. Then again, as current markets have illustrated on a near daily basis, they have a tendency to change their mind pretty quickly, causing the shorts to also be quite nervous, regardless of their current bias.

It is probably safe to expect continued volatility, but at this point it is not clear whether the recent decision by OPEC can reverse the recent sell-off.

Note: As a follow-up, the Times of London is also reporting that OPEC is continuing to work with Russia on oil production, scheduling another meeting for next month. Together, OPEC and Russia would produce about 50 percent of the world's oil, and could exert more influence when working together.

Note: Hurricane Ike is moving into the Gulf. A number of rigs and platforms are already being affected. Friday price action before the weekend should be interesting. Gasoline prices are jumping on the refinery impacts.

Disclosure: None