With oil prices up almost 8% this morning, to $48.70 a barrel, investors are obviously pricing in a high likelihood that OPEC, the 14-country cartel which controls one-third of global oil production, will come to a deal to cut crude production.
The reason for this spike in Oil prices?
Saudi Arabia's oil minister said he's hopeful a deal will get done at today's OPEC meeting in Vienna. Our Senior Energy Policy analyst Joe McMonigle is in Vienna covering themeeting for Hedgeye. He remains skeptical.
McMonigle has a number of questions and concerns about any proposed deal:
- The Math Doesn't Add Up Yet – Saudi Oil Minister Al-Falih suggested the collective OPEC cut would be 1.4 million barrels per day and non-OPEC 600,000 barrels per day. That would require a substantial commitment from Russia.
- Holes In A Production "Freeze" – There is no limit on Nigeria or Libya oil production.
- Deal Hold-Outs Remain – Will Iran and Iraq agree to a production freeze/cut? Both countries have previously said they need to keep pumping.
- Freeze Enforcement – How will they enforce a deal? OPEC has never been particularly good at monitoring deals to cut production. Previous research suggests, from 1982 to 2009, the nine principal members of OPEC produced, on average, 10% more than their quotas supposedly allowed.
(Click here to read McMonigle's latest OPEC dispatches from Vienna.)
As Hedgeye Director of Research Daryl Jones writes in today's Early Look, "A short-term agreement with vague and unenforceable targets won’t keep oil elevated for long."
We're not buying all this oil price optimism.
(OPEC has a lot of explaining to do.)
