We all know how troublesome rumors can be.
No matter how unlikely a rumor may be, there’s always someone who will latch on and run with it.
The same is true in the stock market.
Take, for example, the rumor that the Saudis and the Russians – the world’s largest oil producers – are going to agree to an immediate 5% production cut.
The oil market needs the cut, certainly, as 2016 looks like it will be the third straight year that output exceeds demand by one million barrels per day.
Not Enough Pain Yet
Now, Russia and the Saudis did agree to an oil production freeze at the January level – not a cut. And it’s contingent on both Iran and Iraq agreeing to the freeze.
At this point, that’s really unlikely. And even if all of the parties did agree, there’s the matter of cheating, which they all do and will likely do again.
Mikhail Leontyev, the spokesman for Russia’s biggest oil company, Rosneft (OJSCY), said “Nothing new has happened. This [oil buying] frenzy is idiotic.”
And he’s right.
From Russia’s standpoint, a cutback in output is tough to do. Much of their oil flows from the frozen fields of Siberia. If you cut off the flow of oil during the winter, everything will literally freeze up, damaging equipment.
Plus, they and the Saudis aren’t going to pull back just when they have their common enemy – the U.S. shale producers – on the ropes.
And you can bet the Saudis are not going to cede market share to their rival, Iran.
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Any cutback by the Saudis and Russia will quickly be filled by Iran. Iran has already stated that price doesn’t matter, only market share.
Future Shock Agreement
An old adage says to be careful what you wish for.
There may be future agreement between Saudi Arabia and Russia, but it probably won’t be what most expect. A potential future deal could also include other parties such as Iran and China. Especially if U.S. diplomatic fumbles continue.
What do I mean by diplomatic fumbles?
It all started in September 2014 when Secretary of State John Kerry visited the late Saudi King Abdullah. Oil was still in the $100 range.
Kerry wanted to ratchet up the pressure on the Russians. So he told King Abdullah that the U.S. wanted to see a much lower oil price. In an effort to get Putin, the United States had essentially given the Saudis the okay to crush the U.S. shale industry.
Kerry got his wish – the Saudis cranked up their output – and now we’re seeing the very real consequences here in the United States. Meanwhile, Russia is still producing. In fact, the fall of the Russian ruble has lowered the country’s oil production costs.
The agreement I spoke about earlier may be a new and different kind of oil cartel.
On the production side, it would include Russia, Saudi Arabia, Iraq, and Iran. And on the demand side, it would include big users like China.
The common goal would be to have a reasonable price for oil that everyone can live with – but low enough to keep U.S. production from ever returning to its former glory.
Obviously, the current Saudi-Iran conflicts push any agreement well into the future. But a few more diplomatic fumbles, and a new oil cartel will be here sooner rather than later. And it won’t be one to our liking.