Oil investors were blindsided this week after the Organization of Petroleum Exporting Countries delayed a key meeting on production cuts, as worries about demand in China and Europe continue to mount. U.S. crude had rallied on Monday on anticipation that OPEC and its allies would implement additional cuts at a meeting originally scheduled for Sunday after weeks of volatile trading. But prices tumbled as much as 5% in intraday trading Wednesday after OPEC+ delayed that meeting until next Thursday, as the group struggles to close ranks — with Angola and Nigeria reportedly resisting production targets. “The oil suite remains rather stunned after the cancellation of Saudi Sunday,” wrote John Evans of PVM Oil Associates in a note Friday. U.S. crude recovered most of Wednesday’s intraday losses and trading has been relatively muted amid the Thanksgiving holiday with investors trying to digest the recent volatility. The West Texas Intermediate contract for January was down 20 cents, or .26%, at $76.90 a barrel Friday, while the Brent contract for January was up 57 cents, or .7%, at $81.99 a barrel. “Some of the crazy has left the market as those that imbibe in oil trading indulge in a prolonged bout of navel gazing, seeking to find order among the shared carnage that the price action has endured,” Evans wrote. Though oil is relatively quiet at the moment, U.S. crude could test $70 a barrel and possibly fall to the mid-to-low $60 per barrel range on the demand worries, record production outside OPEC and forecasts of a mild winter in the northern hemisphere, said Again Capital partner John Kilduff. Europe demand headache for OPEC With the meeting delayed, investors are left with more bearish news on the demand side. Manufacturing activity in the euro zone continued its long streak of contraction in November, piling on top of demand worries in China that have spooked the markets for weeks. The euro zone manufacturing PMI came in at 43.8 for November, beating expectations but still well below the mark that indicates economic expansion. The data could not have come at worse time for OPEC, according to PVM’s Evans. “The likelihood of new demand coming from the continent is tantamount to zero giving more reason to be wary for oil investors and another layer of headache for OPEC,” Evans wrote. And Saudi Arabia’s efforts to “drain the swamp” on the supply side are falling very short, as Riyadh struggles to rally OPEC in the face of record production in nations like the U.S., Kilduff said. “It’s undermining the Saudi efforts to get the price really back to $100 a barrel plus,” Kilduff told CNBC’s ” Power Lunch ” on Wednesday. Saudi, Russia and the nuclear option Prior to OPEC+ delaying the meeting, most analysts anticipated the bloc would at least extend the current production cuts, 5.16 million barrels per day in total, into 2024. They would not, however, rule out additional cuts given the current market conditions. JPMorgan and Deutsche Bank think OPEC+ could take another 1 million barrels per day off the market, while analysts with Bank of America and PVM put the number at 500,000. Goldman Sachs said OPEC will use its pricing power to keep Brent between $80 to $100 a barrel. “We see an unchanged policy as the minimum,” Deutsche Bank analyst Michael Hsueh wrote in a note Monday. “With the weakening in the Brent 1-12[month] curve, a 1 mmb/d cut would hardly look out of place as it would land back in the ‘cloud’ of the longer history of quota adjustment.” While OPEC tries to assuage some of its African members, the more important question is how long the marriage of convenience between Saudi and Russia can last, Evans wrote in the PVM note. Russia’s successful, high-profile evasion Western oil sanctions raises the question whether Moscow is really complying with its voluntary production cuts that serve as “the backbone of its diplomatic ties with Saudi Arabia,” Evans said. “The marriage of convenience is made moot by an inconvenient truth that Russia is at service to the needs of its exchequer more than it is has need to service a notion of oil price stability,” he noted. The Saudis do have a “nuclear option” to intimidate OPEC+ into compliance, Kilduff said. They can always threaten to flood the market the oil. “That would be a mess for everybody. So that is their not so veiled threat and that is, again, their nuclear option,” Kilduff said. “I wouldn’t take it off the table for a minute.”
