Making money from Opec output cut deal

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Making money from Opec output cut deal
After years of freezing it, the Opec is ready to turn the gears on output cuts.

Dubai - Higher US inflation and rates on cards now, writes Matein Khalid

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Published: Sun 4 Dec 2016, 5:39 PM

Last updated: Sun 4 Dec 2016, 7:56 PM

The 10 per cent rise in oil prices on news of the output cut deal at Opec's ministerial conclave in Vienna was trading desk nirvana on Wednesday. This is the first Opec output cut since 2009, when Saudi Arabia engineered the biggest output cut (4mbpd) in history to stabilise the post Lehman oil price amid a global recession.
Yet this deal is nowhere near the 2009 scale at only 1.2 million barrels a day. As in 2009, Saudi Arabia, Kuwait, Qatar and UAE will bear a disproportionate share of the output cut. Since Opec produced 33.7 million barrels per day (mbpd) in October, the post Vienna target is 32.5mbpd, exactly the level proposed by Saudi Arabia in September at the Algiers Sheraton.
There are significant aspects of the Vienna deal investors must not ignore. One, Saudi Arabia has agreed to allow Iran to freeze its output at pre-sanction levels and exempt Libya and Nigeria from the output cuts.
Two, Opec needs Russia (now at 11.3mbpd output, a post USSR high), Kazakhstan, Brazil, Oman, Azerbaijan and Mexico to match its output cut with a 600,000 cut.
Three, Iraq has agreed to a 400,000 barrel cut, a policy U-turn in Baghdad. Four, with $400 billion in global capex and drilling budgets slashed since 2014, it is entirely possible that Brent could rise to $60, especially if Trumpkinomics raises US economic growth rates well over three per cent next year.
Five, Saudi Arabia has reverted to its modus operandi during past oil price crash cycles. Flood the markets with black gold until prices fall 60-65 per cent from their peak and then revert to its traditional role of a swing producer with an output cut.
Six, US output is now 8.6mbpd. As oil prices rise, Texas begins to raise output and the Permian Basin, not the Arabian desert, is the world's new ultimate swing producer in the Age of Shale.
My macro take from Vienna? The rise in oil prices will lead to a rise in the American CPI, which is goosed by Trump's economic policy platform and protectionist tirades. This means higher inflation expectations, higher US interest rates and thus more aggressive Federal Reserve monetary tightening. This is the reason the news from Vienna caused the yield on the 10-year US Treasury note to rise to 2.45 per cent and gold to tank to $1,170 an ounce. A macro investor (my tribe de jour!) ignores the four heartbeats of global finance at his own peril. The Trump Superdollar is, not coincidentally, at 14-year high.
The Vienna deal and the embryonic Saudi-Iran rapprochement vindicates my faith in French supermajor Total SA and Omani "too big to fail" Bank Muscat (up 12 per cent from my OR0.38 buy levels!). France and Oman are both beneficiaries of higher oil prices and a potential Iran "peace dividend".
Saudi Arabia's new policy on the oil markets has seismic implications for the economic future and international relations of the Middle East. The Kremlin has agreed to a Saudi request to cut output to 300,000 a barrel. This new diplomatic détente, I desperately hope, leads to a credible peace deal in Syria, the human tragedy of our times. Economics now necessitates that Saudi Arabia, Iran, Iraq and Russia no longer engage in zero sum games of global geopolitical chicken.
While Opec acted as Santa Claus for oil bulls and owners of Shell (no div cut). Total (magnifique free cash flow!), Chevron (rising output) and Bank Muscat (the sultanate is most leveraged to higher oil prices and its biggest bank trades at 0.7 times book value and six times earnings), the deal means it is mission critical to track output trends in Libya, Nigeria, Russia and Texas shale.
The immediate Pavlovian response to the news from Vienna hit my Bloomberg screen was to buy Hess, Anadarko, Devon Energy and EOG Resources, all up 11-13 per cent! Now that the post Vienna range for oil prices is $50-60, I believe it makes strategic sense to accumulate Saudi Arabian stocks, even though the trigger to go long the kingdom was at Tadawul 5,600 on the eve of the inaugural $17 billion Eurobond sovereign new issue.
The Vienna deal also benefits Bank of America, the most rate sensitive money center bank in the world. Bank of America is up 26 per cent in November. Money no longer talks on Wall Street - but money shouts at a decibel count heard all over the world in the Age of Trump!
 


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