$60 A BARREL THE NEXT SURPRISE FROM OPEC?

After Brexit and the election of Donald Trump are we ready for an OPEC production cut at the end of the month. This is our prediction. We believe that OPEC has no other choice but to reach an agreement and limit production. An agreement will be reached with establishment of a moratorium to limit the production over a 12 months’ period. This will push the price of oil to settle around $60 with a peek even higher for a short period of time.

So how did we arrive to this conclusion?

In the USA, the President-elect's view on energy are aggressive. He is a big supporter of the U.S. oil, gas and coal industries and his focus appears on cheaper - as opposed to cleaner – energy, a similar approach than China.

He mentioned that he intends to eliminate the moratorium on coal leasing, and open onshore and offshore leasing on federal lands. His goal is energy independence for the United States and slowing the import from the OPEC countries. At least it is what he said and promoted during the campaign. It remains a huge task for the U.S. to become independent from importing energy from OPEC as in 2015 18% of our energy consumption was coming from OPEC. Although it is doubtful that we will become completely independent from OPEC it is fair to see a significant reduction in our Import that will be fueled by a lot of policy incentive on the domestic front. As an entrepreneur President Trump will probably come to the rescue to all small operatives and will encourage the banking system to help the small companies that were chastised by the banking system and seek protection under chapter 11 during the past 24 months. In order, to assist the domestic market the new US Administration will need higher price per barrel. Everyone knows that price needs to be around $55 to $60 to allow the US domestic market to survive.

The large US operators such as EXXON have been suffering also from a depressed price and Exxon will need shortly to adjust its reserve value in the balance sheet will send shock waves to the stock market when they will announce it. So, the USA will do everything they can to pressure the OPEC countries to get a price around $60.

On the other side, OPEC knows what is coming with a Trump presidency and it is not as friendly as it was. Trump at least in his declarations has made very clear that he does intend to be more assertive in dealing with foreign powers including the Saudis, Iran, etc. Will he impose the return of sanctions on Iran is an unknown but he may try or he may resolve the issue through economic dealings with limitation on oil production to allow the price of oil to go back up.

It is important to remember that oil at a higher threshold will generate creation of jobs in the USA and it is only if oil prices reach $100 that it become very unsettling for other industries.

Inside OPEC the Saudis need money. ARAMCO is going public in 2018 so they need to improve the balance sheet and show good results and like all the large companies higher price means higher margins means more cash and higher valuation. Once again another trend toward higher price. Iran needs also higher price. In the past 12 months after the sanctions were lifted Iran rushed to go back to output similar to the prior sanctions period and they continue to do so but like every member of OPEC they will need higher pricing especially if their production become limited due to political tension with the West. All other members are in favor of higher prices and almost all of them have rushed to higher output in the past few months but we believe that announcing a moratorium with limitation of production output increase with eventual production decrease over a period of time is coming this month. And the political climate especially in the USA may have been the last triggering event that will make OPEC to agree to a limitation.

Based on our internal analysis we expect to see an agreement in Vienna on November 30 and we predict a spike in price before the end of the year to reach $60 as the new reference.