It could be a defining week for oil, starting off with the global warming summit in Paris and ending with one of the most crucial OPEC meetings in recent memory.
Long-term demand projections are in play as global leaders will try to agree to steps to reduce carbon emission. President Barack Obama is meeting on the sidelines with China's President Xi Jinping trying to perhaps find a way to work together to reach a historic global agreement. Of course what is clear is that at least in the foreseeable future, the world is going to demand more oil and Natural gas.
It has been just over one year since Saudi Arabia declared a production war on U.S. shale producers, but in doing so it has brought some other OPEC members to their economic knees as well. The members will have to deal with the return of Iranian oil and pressure from within their ranks to find a way to adjust output or deal with another potential price crash.
Saudi Arabia of course is playing hardball because they see signs that victory is within reach for the price war they began. In fact they have warned others that not only should they not relent on output, they are telling others that they need to invest more. While on one hand Saudi Arabia's oil minister, Ali al-Naimi, has said that he will work with others to stabilize the market, he is also looking at the big picture by saying that investment in the oil industry must keep pace with forecasts for future demand to ensure the stability of the market. Naimi warned that demand for oil is continuing to rise and to meet this growing need, there should be a continuation, if not an increase, in the pace of investments in the oil industry.
On Friday oil took its cue from the Chinese stock market and ended sharply lower. Now with China rebounding, oil is as well. All week oil will be focused on OPEC comments as there will be many times OPEC will be talking ahead of the official meeting. Will the Saudis allow for a cutback in production? The only way that happens is if the Russians go along with it. In the meantime, expect a deal to allow for the orderly return of Iranian oil.
Yet the thing that the oil bulls have going for them is no one expects anything to come out of this OPEC meeting. In other words, the market is expecting more not less production as Iran comes back online. So most of the bearishness should be priced in. The inability of oil to close below $40.00 in recent weeks gives us a good area to try to build a long term position. Also look deep down the cure as the market is putting in a major bottom that is causing production destruction that will cause a major rally down the road.