OPEC VERSUS TEXAS: $50 OR $65?

Finally, as we predicted OPEC on Wednesday agreed to its first oil production limits in eight years, triggering an oil rally and as of today, the new price with support is at $50 at Market close. Some analysts are wondering about the real war on cut between the various OPEC members and whether some may be tempted to cheat and continue to produce beyond the limits.

The reality will be how OPEC will police this new cut but overall our belief is that it will be followed because it is the interest of every producers inside and outside OPEC.

OPEC confirmed yesterday a cut in its oil production from 33.8 million barrels a day to 32.5 million barrels a day. Since 2014 due to global oversupply and booming U.S. shale production price of Oil collapsed and all production countries heavily dependent on Oil production and every single production companies have suffered tremendously precipitating some countries on the edge of civil war, Venezuela being the best example.

OPEC's announcement sent crude oil prices soaring over 10 percent on Wednesday and today the growth continues. We predicted a few weeks ago, that we will see a new reference at $60 and we maintain our opinion.

The issue now will be compliance. Kuwait, Venezuela and Algeria all agreed to monitor compliance of the OPEC agreement, per a Reuters report. But there are no penalties for non-compliance.

A lot of the oil pundits are skeptical but we believe that the economic advantages for all members is so obvious that they will keep at least for a while an attempt to respect the agreement.

Under the OPEC deal, Saudi Arabia, will take the lion's share of cuts by reducing production by almost 500,000 barrels a day to 10.06 million barrels a day. United Arab Emirates, Kuwait and Qatar - would cut by a total 300,000 barrels a day. Iraq agreed to reduce production by 200,000 barrels a day.

Now the challenge for OPEC and especially Saudi Arabia is to sit around a table with Russia and Iran to reach an agreement. Last week the Saudis walked away from the negotiation but Vladimir Putin declared a few days ago, that he was ready to reduce the Russian production by 500,000 barrels a day. Russia has a real interest in stabilizing the price at a higher level and will surely do its part but Saudis and Iranian need to halt the hostility….a real challenge.

Higher crude oil prices will also feed a cycle of higher prices feeding higher production, particularly from low-cost U.S. shale oil producers. We will have both Canada and Texas against OPEC. As we know the past 2 years have been grueling for Texas production but the industry was able to survive so with higher price Texas producers are dancing and ready to open the ballroom and we do not foresee any production lowering trend in Houston anytime soon.

But according to several analysts the level of $55 is the key point for shale production to become sustainable so the question is will OPEC allows it or will the price will settle around $50 and less than $55.

Our opinion is clear we believe in $65 which should make everyone happy in Texas and in the Middle East let’s see what the next few months will teach us, and the first step is next week when OPEC meets Russia.