OPEC Punts Elusive Production Agreement to November

Takeaway: Goal is production ceiling but the “how” remains a difficult challenge. It is the reason why a freeze deal was not achieved this week.

Editor's NoteThis is an excerpt from an institutional note written by Senior Energy Analyst Joe McMonigle. For more information about our research contact


OPEC Punts Elusive Production Agreement to November - z oil rig


After failing to agree to a production freeze in Algiers, OPEC went to its “Break Glass in Case of Emergency” box Wednesday and said it would try for a revised “production target” when the group convenes again on November 30 in Vienna.


Faced with the prospects of a price decline for not meeting self-imposed expectations of a freeze accord, OPEC said in a statement it “opted for an OPEC-14 production target ranging between 32.5 and 33.0 million barrels a day (b/d).” The 32.5 million b/d number was selected because it represents OPEC’s own forecast demand for its crude in 2017.


OPEC hopes the market will view that a deal to agree to a deal in the future is a deal. Oil was up about 5% on Wednesday but it remains unclear if that sentiment can be maintained after a closer examination of this shaky strategy.


Our preference would have been for OPEC to take its lumps on price after not getting a deal and instead say the talks had made significant progress and laid the foundation for a productive meeting in November.  Now we fear the “production target” strategy has only supersized expectations for the November 30 Vienna meeting and created more risk and uncertainty for the market.


Nonetheless, OPEC has stated its goal of a “production target” in order to “accelerate the ongoing drawdown for the stock overhang and bring the rebalancing forward.”  The “how” remains a difficult challenge. It is the reason why a freeze deal was not achieved this week.  As a result, we believe the path out of Algiers is on thin ice and provide the following rationale for why we are not optimistic about the chances for success. 


OPEC Punts Elusive Production Agreement to November - mcmon


First, the significant delta of 500,000 b/d between the stated production target range of 32.5 and 33.0 million b/d should not inspire confidence. In addition, for purposes of calculating the “cut” we have no indication what level will be used as the production baseline. Big difference between Saudi production in July of 10.67 million b/d and January’s 10.2 million b/d.


Second, the OPEC President told reporters at a press conference Wednesday that the start date and duration of the revised production target are yet to be decided. The most common terms we have heard are for an effective date of January 1 and a one-year duration. But Iraq has said recently that it can only agree to a duration period of several months.


Perhaps the biggest hole in the production target “deal” is that there will be no actual production constraints on Iran, Libya and Nigeria. The OPEC formal statement was silent on the issue of exemptions but several ministers acknowledged it in comments to reporters. These three producers could provide a big 1 million b/d leaky hole in any OPEC production target ceiling. 


Return to OPEC supply management to boost prices may create a lifeline to US shale producers.  US crude production today is about 600,000 b/d less than one year ago. New Iranian production this year since nuclear sanctions were lifted have just replaced the declines in US production. If prices rise above $50, US shale producers may end up replacing any OPEC decline from a production ceiling. It will be difficult to rebalance the market if US shale production starts rising prematurely.


Certainly market conditions could change between now and November 30. Plus we do not believe the Saudis will want to forfeit any market share to Iran. As a result many thorny issues lie ahead that present real challenges to achieving a revised “production target” in November.

Poll of the Day: Is OPEC Front-Running Their Own Rumors?

Takeaway: What do you think? Cast your vote. Let us know.

Poll of the Day: Is OPEC Front-Running Their Own Rumors? - z opec stock

CHART OF THE DAY: It's Just Math...

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.


"... In the Chart of the Day below we show the spread between Nominal GDP growth and Nominal Wage Growth (aggregate wage income). The intuition for understanding the profitability implications comes from viewing the macroeconomy as you would a company or household. At the aggregate level, Nominal GDP equals National Income or Total Revenue. Aggregate Wages represent Costs (labor costs are typically the biggest input costs for firms).


If costs are growing faster than revenue - which is the case currently and is represented by a negative spread in the chart below – margins and earnings growth becomes increasingly challenged. If labor growth continues to grow at a premium to output growth and if aggregate wages continue to grow at a positive spread to revenues (nominal GDP) then productivity will remain negative and the corporate earnings recession will remain more-or-less the prevailing reality."


CHART OF THE DAY: It's Just Math... - Nominal GDP less Nominal Wage Growth CoD

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Peterson: How to Successfully Trade Sentiment

Behavioral finance expert Dr. Richard Peterson, a board-certified psychiatrist and CEO of MarketPsych, sits down with Hedgeye CEO Keith McCullough in this edition of Real Conversations. An expert on financial market psychology, Peterson discusses how to potentially time stock market turns by analyzing investor behavior and social media. His firm produces sentiment and macroeconomic indices derived from language analysis of global news and social media. His latest book Trading on Sentiment digs underneath technicals and fundamentals to explain the primary mover of market prices - the global information flow and how investors react to it.

Cartoon of the Day: GDP Report Preview

Cartoon of the Day: GDP Report Preview - GDP cartoon 09.28.2016


"US GDP is going to be reported tomorrow and it’s closer to 1% y/y than it’s been all year," Hedgeye CEO Keith McCullough wrote in this morning's Early Look note. U.S. #GrowthSlowing continues.

McMonigle's Quick Take On Today's OPEC Oil "Freeze" Headline

Takeaway: Let's wait and see the details about this OPEC oil production "freeze."

McMonigle's Quick Take On Today's OPEC Oil "Freeze" Headline - OPEC cartoon 08.24.2016

Oil is up 5% today... WHY?


According to Reuters' two OPEC sources, the organization:


"... Agreed on Wednesday to reduce its oil output to 32.5 million bpd from the current production levels of around 33.24 million bpd. The producing group will agree concrete levels of production by each country at its next formal meeting in November, the sources said.


One source also said that once production targets were reached, OPEC would reach out to non-OPEC producers for cooperation."

Our Quick Take?


Here's Hedgeye Potomac Senior Energy Policy analyst Joe McMonigle who has been spot-on about all the OPEC oil production "freeze" rumors all year.



Here's McMonigle's recent take on an OPEC "freeze" from earlier this month.

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