RE:Well, this could make things interesting...5 Reasons We Believe OPEC Will Cut Production On Dec. 4 .......................... Summary Saudi Arabia's strategy of not balancing the oil market has accomplished the mission of stopping shale production growth. The mission was successful, but it was also painful for the Saudis where foreign currency reserves are being depleted rapidly. Few people expect an OPEC cut on December 4, but given the modest cut required and the consequences of not cutting it may be the logical move. We believe that the time has come for OPEC to adjust their "market share at any price" strategy. While making short term predictions is clearly a foolish venture, we believe that there is a lot more potential for Saudi Arabia agreeing to cut production than the market currently believes. Why do we believe that? Because it makes a lot more sense at this point to cut than it does to let oil languish at prices that don't work for anyone. Here are the five reasons that we believe support the argument that it makes more sense to cut: Number 1 - Mission Accomplished If the reason that the Saudis did not cut last fall to support the price of oil was that they wanted to slow down American shale production then..mission accomplished. The North American oil (NYSEARCA:USO) rig count which touched 1,600 not much more than a year ago now stands at 564 as of the most recent Baker Hughes Rotary Rig report. The oil price collapse hasn't slowed the rate of drilling, it has slowed it to a trickle. And the number of rigs are still dropping. The EIA production numbers show production in the U.S. having peaked at 9.6 million barrels back in April and now down over 400,000 barrels per day since. The most recent EIA Monthly Drilling Productivity Report (DPR) projected an accelerating rate of decline as you can see from the DPR projection for the Eagle Ford. Number 2 - Saudi Arabia Never Wanted Oil Prices This Low Saudi Arabia may have been willing to withstand lower oil prices for a couple of years in order to teach the shale boys some discipline. But it seems very unlikely that the Saudis thought the price would go down this far and stay there for this long. Note this article from last fall which quotes Saudi officials as being willing to accept prices as low as $80 for two years. The article also quotes a representative of Gulf ally Kuwait suggesting that $76 or $77 would be the bottom for oil prices. Those predictions haven't panned out and while the Saudis can't go out of business like some shale producers they are undoubtedly feeling the pain. Here are the estimated break-even oil price that the Gulf countries need this year as calculated by the IMF, the Institute of International Finance ((NYSE:IIF)) and Deustche Bank. Kuwait: $49.40 ((NYSE:IMF)), $62.80 , $78.40 (Deutsche). Qatar: $60, $65.30, $76.80. UAE: $73.80, $73.60, $80.80. Saudi Arabia: $87.20, $109.40, $104.40. Oman: $102.60, $113.20, $110.00. Bahrain: $127.10, $130.20, $138.10. Needless to say none of these countries are enjoying the current price of oil either. Number 3 - Change In Language To Stability The oil collapse has accomplished what the Saudis set out to do. It has also caused them a lot of pain for themselves. Perhaps that is why we are seeing a significant change in the language being used by the Saudis when discussing the market. The word coming out of Saudi Oil Minister Ali al-Naimi's mouth these days is stability. We have seen him refer to wanting a stable oil market several times in recent weeks including last week in Bahrain: "Saudi Arabia is a very reliable supplier. We cooperate with OPEC and non-OPEC countries to stabilize the market," This tone is very different to what we were seeing from the Saudis and other GCC countries nine or ten months ago when Ali al-Naimi said things like this: "Whether it goes down to $20, $40, $50, $60, it is irrelevant" Stability is now what the Saudi's want for both producers and consumers. A year ago they wanted a volatile crash. Number 4 - Oil At This Level Could Collapse The Saudi Currency Bank of America just released a report on the stress that the Saudi Riyal is under by currency speculators. The 12-month riyal forward contracts - watched by experts for signs that traders are betting on a collapse of the peg - has spiked violently to 535 from just 13 points in June. As we noted earlier the Saudis need somewhere between $87 and $109 per barrel in order to balance their fiscal budget. Oil prices where they currently are result in a significant drawdown of their foreign reserves. The backing of those reserves provide the support for the value of the Riyal. The further the reserves fall the more pressure the currency will feel. The Saudis may need to decide which is the lesser evil? Cutting production and improving the price of oil in order to strengthen their currency reserves or holding strong and letting the Riyal fall. Remember, the Saudis import virtually everything and if their currency weakens everything becomes more expensive. A weak currency isn't so bad if you are an exporter (like China) and you want to stimulate demand for your goods. If you don't export anything (other than oil which is priced in USD) then you want a strong currency. Imagine how difficult it would be to keep the Saudi general population happy in the face of serious inflation. High inflation in Saudi Arabia would be a perfect recipe for regime change. Number 5 - They Really Don't Have To Cut Much Everyone inside OPEC is hurting. Usually the Saudis are required to take on the bulk of any production cuts required to balance the market. After a year of really desperate times the Saudis should be able to get most every OPEC nation to contribute to a production cut. And as we have written previously the actual daily oil supply and demand fundamentals are already pretty much in balance. The oil glut was created at the end of 2014 and in the first quarter of 2015. If OPEC were to take a million barrels of oil off the market it would make a huge difference to both the price of oil and the amount of oil in inventory. OECD oil stocks are 200 million barrels higher than the five year average. A million barrel per day cut by OPEC would (in our opinion) put the oil market into a daily deficit of that million barrels. It would take only 200 days to reduce inventory levels to normal. OPEC produces just over 30 million barrels per day. Saudi Arabia produces a third of that. If every OPEC country were to take a share of the million barrel per day cut proportionate to their share of OPEC's production it would mean that the Saudi's would need to cut only 300,000 barrels per day. That isn't much of a cut at all and given all that we have laid out above seems like the most sensible thing for the Saudis to do.