Learning to Dance the Viennese Two-Step

For the past 24 hours, all eyes in the energy sector have been transfixed on Vienna.

Once again, what I have come to call the “Viennese two-step” at OPEC headquarters will translate into crude oil prices moving in the near term.

It also means I get little sleep as the networking among sources is in high gear – not exactly what I need after 22 hours of flights back from Singapore, but the intrigue here beats out jet lag.

The first step on the dance floor is what appears publicly in the press statements coming from the cartel. The second, on the other hand, is the net impact on actual volume in the market.

This latter step often plays out below the surface.

As I write this early on Friday, the world is once again awaiting a move from OPEC in conjunction with primary outside member Russia to bolster global crude oil prices.

The market briefly panicked yesterday when the cartel supposedly finished its meeting without a statement. However, this time around, several of the seasoned TV talking heads had this one right.

OPEC needs the support of Russia to reach an acceptable cut in worldwide production. And the Russian Energy Minister Alexander Novak didn’t even land in Vienna until last evening.

Here is what my Saudi, Russian, and Europeans sources are telling me…

Country Dancing

The Russians will contribute an effective cut of about 300,000 barrels a day to what is likely to be a cut in the range of 1 million barrels from OPEC (most of that, of course, coming from the Saudis).

That aggregate of 1.3 million barrels a day is at the high end of my prediction well known to Oil & Energy Investor readers. The ceiling there was a 1.4-0million-barrel cut.

However, an additional drain off from a Canadian decision to withhold an additional 300,000 barrels of heavy oil from the market means the overall cut will be much higher.

Whatever “public” announcement is made about the amount of the cut, the genuine “second step” will add 100,000 to 200,000 of cuts beyond that.

First, Venezuelan production will continue to contract, while Iraqi exports will cap, as increasing production levels there will not translate into appreciable rises in exports.

In other words, the recent oversupply problem we’ve had is looking to swing aggressively the other way.

In Vienna, Iran is largely a nonissue in all of this because it has an exemption from OPEC monthly production quotas.

Following this week’s announcement that Qatar is leaving the organization next month, Iran is now making sounds that it may pull a disappearing act of its own.

Now, Qatar adds only small amount to monthly cartel oil production, but it a major international provider of natural gas via liquefied natural gas (LNG).

Iran’s departure from OPEC, however, will result in a policy outlier for several major market players.

But Teheran is poised to redirect heavily in the LNG direction – with initial support from Chinese national companies – as U.S. sanctions have put advancing oil exports in doubt.

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America Joins the Dancers

All this is setting up an interesting Qatar-Iran-Russia development on the gas side with the Gas Exporting Countries Forum (GECF) emerging, as I noted in the last issue of Oil & Energy Investor.

Recall, as I have discussed here on several occasions, that the main problem in pushing global prices down was an eleventh-hour political stunt by the White House – providing last-minute exemptions to the eight largest importers of Iranian crude from the sanctions for 180 days.

For over a month, the market had been factoring in additional production aimed at offsetting the heavy declines expected in export availability from Iran.

When it became clear that the exports would still be allowed, the market was facing some heavy oversupply.

In the U.S., it will take several weeks to drain off the excess pumped up that has succeeded only in pushing down prices – and we’re seeing indications that that is now taking place with the declines in supply finally registering over the past several days.

As short artists attempted to squeeze out some last returns of what had been largely a final stage artificial downward push in oil prices, a more organized balance has set in.

Not without bumps in the road, of course.

But the impact of politics, at least for the moment, has been “trumped” by more valid market indicators.

The official OPEC-Russian communiqué is not yet out as I write this, but what my network is telling me seems to be settling in.

Crude oil prices are spiking up in both London (Brent) and New York (WTI) by more than 4%.

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