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Crude oil remains weak.
Fundamentals are still negative with one bright spot.
Technicals are at a tipping point.
April 17 - The market is dubious.
Three reasons for a surprise from Doha.
Three reasons for a surprise from Doha
In baseball, you get three strikes and then you are out. However, for OPEC, a new umpire has appeared on the scene. The reason that this is a "special" get-together for the cartel is that the world's second-largest producer of the energy commodity, Russia, will be in attendance. Russia is a close ally of Iran and they are not a member of the cartel. Iranian-Saudi relations have deteriorated over recent months given the proxy war in Yemen and a cessation of diplomatic ties over the execution of a Shiite cleric in Saudi Arabia earlier this year. Iran has been vocal about their intentions to increase production now that sanctions have eased. The theocracy claims it is their sovereign right to produce and sell more oil in the months ahead given their re-emergence on the world scene. However, the Saudis have said that there is no way they will agree to a "freeze" unless all parties adhere to it. Thus, there appears to be a stalemate. Last week the Kuwaiti oil minister told reporters that there will be a freeze in production, prompting denials from the Saudis. All of the pre-meeting positioning leads up to perhaps the most important OPEC meeting of this century, that is not even a scheduled meeting, but a "special" gathering. There are three reasons why I believe the oil market will finally receive a concrete policy initiative from the cartel after the April 17 congregation.
First, Russia and its leader, Vladimir Putin, have a huge interest in a higher price for oil. As the world's second-largest producer to the Saudis, Russia has a unique role at the meeting as a comrade-in-arms with Saudi Arabia as their interests are aligned. The stage was set for this meeting at a get-together between the Russians and Saudis. At the same time, Russia's close relationship with Iran means that Putin and company can influence the theocracy in ways that other members of the cartel cannot. The Iranians have stated that they wish to raise production to 4 million barrels per day. Between Russia and the Saudis, combined output tops 20 million barrels per day. In the interest of a higher oil price, the two largest producers could make concessions, covering the increase in Iranian production and splitting the difference. After all, a 10%-20% rise in the price of oil is well worth a marginal cut in production to satisfy the wishes of Iran.
Second, the Saudi Kingdom now has a vested interest in a short-term increase in the price of oil that is sustainable for the next six months to one year. The Saudis have been vocal about diversifying away from crude oil and building a $3 trillion sovereign wealth fund. To accomplish this, they will offer shares in Aramco to the public. The success of an IPO for the sale of 5% or more of Aramco shares depends on the valuation of the company. The higher the oil price, the more money the IPO will fetch. The Saudis are preparing for this IPO; they terminated a long-standing refining arrangement with Shell (NYSE:RDS.A) (NYSE:RDS.B) in March. A result from Doha that causes the price of oil to rise is in the best interest of Saudi Arabia at this point.
Finally, a successful conclusion will increase the stature of Vladimir Putin on the world stage. Over the past few years, forays into Ukraine and petulance at the West have decimated the Russian economy. However, recently Putin's star has been rising again. The Russian leader played a positive role in the final agreement between the West and Iran. Putin has cooperated with the U.S. and Europe in terms of fighting ISIS in Syria and surrounding areas. A diplomatic victory in Doha will be yet another feather in the Russian leader's cap with an economic bonus. Higher oil will take the pressure off the Russian economy and cement his domestic position. It will also leave Russia with an unofficial, yet powerful role in the cartel for the future.
It appears to me that the stage is set and interests are aligned for some type of agreement in Doha on April 17. The low oil price has been one of the causes of tremendous volatility in world markets. A stable oil price would be welcomed by most governments and monetary authorities around the world. If there is an agreement, it will be Mr. Putin who will receive the credit and adulation. Therefore, I am quite sure he is working behind the scenes to make the gathering nothing more than a formality.