OPEC Meeting Tensions

Jim Brown
 
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This should be an interesting OPEC meeting given the various events affecting the OPEC nations.

OPEC meets again this week and tensions could be high. Iran just agreed to a deal with the 6 UN nations over their nuclear program and Saudi Arabia is strongly against the agreement. Saudi does not trust Iran and they are bitter enemies. They butt heads all the time in the OPEC meetings and this time is sure to be a conflict filled event.

Iran is talking about the agreement as though the sanctions on oil sales had already been lifted. Iran is currently exporting about 750,000 bpd. The agreement allows them to export up to 1.0 mbpd. That is far below their claimed 3.0 mbpd capability. Their exports have been severely hampered by the sanctions and the inability to insure or be paid for export cargos.

Iran is already talking up increased exports to Asia as a result of the agreement even though it would be at least six months before they could get permission to increase exports.

With oil prices at a five-month low in the U.S. and imports into the U.S. declining there is a lot of OPEC oil without a home. If Iran were to suddenly begin dumping even more oil into the market the price would fall even further.

Saudi Arabia has benefitted greatly from the sanctions on Iran. Saudi pumped more than 10.0 mbpd since early 2012 when sanctions begin to really impact Iran. The return of Iran as an accepted producer is going to mean Saudi Arabia is going to have to cut production and probably by a lot.

The OPEC ministers will decide if they want to maintain the current production quota for all members or reduce it to support prices. Any decision to cut production would create even more hostility among members.

Iran is not currently bound by any quotas since they are operating under sanctions. Iran normally joins with Venezuela in pressing for lower production quotas to push prices higher. Iraq also has no quota since it is in recovery mode and production is volatile. That means everyone else would have to voluntarily cut production is Iran and Iraq suddenly began pouring more oil into the market.

Complicating the issue is the debate on a replacement for the Secretary General Abdallah Salem El-Badri. The secretary general has already completed a yearlong extension of his term because the ministers could not agree on a replacement last year. Iran and Saudi Arabia both wanted different people and a serious confrontation resulted that ended in a deadlock.

This year Iran is nominating Gholam Hossein Nozarim, a conservative and former oil minister. Saudi Arabia is nominating Majid al-Moneef, a member of the country's powerful Shura Council. There is a strong possibility they will deadlock again given the bitter rivalry between Iran and Saudi Arabia and they might ask Badri to remain for another year.

On Sunday former CIA and NSA Director General Michael Hayden said "Right now, the Iranians are far too close to a nuclear weapon. We have hit the pause button. Now we have got to negotiate hitting the delete button with them. Iran is going to be a nuclear threshold state."

All the prior UN resolutions on Iran called for a complete dismantling of its nuclear program and all materials shipped out of the country. With President Obama's new deal with Iran we have accepted Iranian nuclear enrichment. It will be impossible to put that genie back into the bottle.

Quite a few analysts and various officials of other countries believe this is a bad deal with Iran. They were counting on the U.S. to maintain the red line and through sanctions eventually shutdown Iran's nuclear program. This sudden deal has created a lot of animosity towards the U.S. for letting the world down.

It is my hope that Iran shows its true colors before the six months is up and they are forced back into the nuclear box.

Market

The major indexes finished mixed last week but with minor gains for the week. The Nasdaq and Russell 2000 were the strongest performers and that suggests market sentiment is improving again.

The first two days of December are normally volatile for the Dow as a result of portfolio adjustments. However, the next four weeks are typically bullish with 7 of the last 7 and 9 of the last 11 years posting gains.

Jim Brown

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