OPEC Decision: Smooth, or Too Smooth?

All the rumblings of discontent at the OPEC meeting in Vienna vanished as members agreed to the full production freezes/cuts that were discussed in Algeria. The pound was the top performer while the yen lagged and oil gained more than 8%.

What puzzled us repeatedly in the lead-up to the OPEC meeting was how bitterly countries were fighting quotas when history has shown that they can easily be flouted.

What makes us suspicious in the aftermath of the agreement to cut 1.2 mbpd from October production was how easily it came together in the end. Iran and Iraq's quotas are at lower levels than they wanted and, perhaps, they are at levels below where they intend to produce.

OPEC has no real enforcement mechanism and every member nation has routinely over-produced in the past.

At the end of the day, the consequences of balking at a deal were far higher than agreeing, even if member countries don't intend to respect the deal. For individual countries, there was absolutely no downside to agreeing and in the process, OPEC convinced Russia and others to join in cuts.

Ultimately, the decision may prove to be nothing more than a publicity stunt but it worked so far with WTI finishing up $3.75 to $48.98. There is a chance of a 'sell the fact' trade in the coming days on skepticism about whether the quotas will be complied with. There was even some evidence of that as the deal was formally announced and crude plateaued.

The question now is whether the market gives OPEC the benefit of the doubt. The answer might be in the technicals. WTI traded above the previous Nov high of $49.20 but closed below it. That's an early negative sign but we stress that it's early. If crude can close above $49.20 (or better yet $50) in the day ahead, then expect the oil bulls to grab some momentum.

Tangentially from crude, the mediocre performance of the Canadian dollar on Wednesday was a surprise. USD/CAD finished close to flat despite the huge oil rally and Sept Canadian GDP at 0.3% was better than 0.1% expected. Of course, it might just be a month-end skew.