Oil gushed higher on China's surprise rate cut but also as traders increased bets that OPEC will have no choice but to cut production when it meets on Thanksgiving Day.
China's central bank for the first time in more than two years, firing up a global risk rally that was also driven by the European Central Bank's easing program. Oil futures began rising Thursday on speculation about OPEC and promise to stay volatile into next week. Iran is also a factor for the market, as Monday's deadline for a deal on its nuclear program approaches.
West Texas Intermediate futures for January were up nearly 1 percent, holding above $76.50 per barrel, while futures rose above $80 per barrel, a jump of about 1.4 percent.
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OPEC has been publicly divided on the need for a production cut, just as Wall Street is fairly evenly divided on whether OPEC will act when it meets in Vienna on Thursday. Venezuela has said it is willing to cut production, while Libya and Ecuador also called for lower output.
"What Libya, Venezuela and Ecuador say isn't really a counterbalance to what the Saudis do," said Gene McGillian, analyst with Tradition Energy. Iran has also called for OPEC members to stabilize prices.
"I think some of the shorts that have money in the market are looking to scrape it out," McGillian said. "The market is trying to stabilize." He said dovish comments from ECB President Mario Draghi and the helped support prices, and cold weather in North America should help lift demand.
"You're going to see book squaring ahead of the determination of the Iran nuclear talks. It's a big week for oil next week. The talks are expected to conclude on Monday and then OPEC meets Thursday," said John Kilduff of Again Capital. "I think you're going to see this market be volatile as everybody gets squared and lays their bets down. There are well-articulated views on each side."
Bank of America Merrill Lynch said it expects OPEC to agree on a 500,000 barrel-a-day cut next week, and it expects that should support prices before oil heads back up to $90 over the next several months.
"They're running around like chickens without a head, but they're going to do something," said Francisco Blanch, Bank of America Merrill Lynch head of global commodities and derivatives research. OPEC has a production ceiling set at 30 million and output is around 30.6 million barrels a day.
"We're calling for a half-million barrels a day in the ceiling. That hopefully is enough to get prices back up again, but we'll see," Blanch said.
OPEC members, including Saudi Arabia, have budgetary break-evens near or above current prices and that should be a factor in their decisions.
But street views vary on whether members of the Organization of the Petroleum Exporting Countries can agree among themselves on a production cut since Saudi Arabia has been signaling it will protect its market share and that it won't be the only country to shoulder production cuts.
Kilduff said part of the volatility stems from the various views, with some firms seeing no cut at all. He is in that camp.
"If they don't cut, prices will fall precipitously, straight down through $70 in rocket fashion," he said. "There's a lot evidence out there with people buying the straddles ... that means people don't know which way it's going to go but it's going to go a long way in either direction."
One popular call has been to buy the March $75 straddle, he said. "You're buying the March 75 put (options on WTI futures) and buying the March 75 call with the idea that prices are going to go a long way from $75—one way or the other," he said.
Daniel Yergin, vice chairman of IHS, does not expect OPEC to cut production at this meeting.
"I don't think any of the members of OPEC are going to be giving thanks on Thanksgiving Day because to them what happened in the oil market is a real shock," he said.
While oil prices had been higher than supported by fundamentals before the $30 decline, he said OPEC members have been surprised by how far crude has fallen. "They're worried it will fall further, so I think this OPEC meeting is just a first stage in terms of them adjusting to what is a new reality in the world oil market."
The surge in U.S. oil production has added more crude to world markets at a time when demand growth has slowed. Yergin said the signals so far are that there will not be an agreement at this meeting, unless something very dramatic happens.
Yergin said OPEC is a fractured organization, with some members, like Venezuela, more desperate for higher prices. "I think the Saudi position is different than the other countries because what they want to do is defend their market share," he said, noting the Saudis want to see real cut backs from the other producers.
Whether it's now or later, production cuts will only come when there's a real panic among members.
"I think at this point there are a lot of barbs going back and forth," Yergin said.
"I think the recognition is really there, now that this boom in the United States is not going away," he said. U.S. production reached 9 million barrels a day this month, a level last seen in 1986 and a million barrels more than a year ago.
Blanch said OPEC's strategy will be to keep markets volatile, and by doing that they will be hurting some U.S. shale production. He said Saudi Arabia needs oil prices above $90 to meet its budget, though some estimates are lower.
"Part of the strategy is going to be creating volatility in the market and being confusing, and obscure what they're going to do," he said.
Blanch said the shale boom was driven by credit, and some marginal players are already being sidelined.
"By keeping prices more volatile, you slow down fixed income investment into the energy sector," he said. Saudi Arabia is also more nimble than the diverse group of producers that drove the U.S. oil boom.
"They can respond faster to price fluctuations and demand fluctuations than shale producers. A shale producer needs six months to a year, and in two to three months, the Saudis can respond ... they have the upper hand," said Blanch.
Other recent periods when OPEC cut production were in 2008-2009 during the financial crisis, in 2001 and in 1998-99.
"They only need to cut a little to change market direction, get all the shorts out of the holes," Blanch said.
U.S. production growth at current levels of around $76 per barrel would be 500,000 barrels a day next year, half of this year's growth, according to BofA. A drop to $60 would leave production flat.
Blanch said the Iran situation may continue as it has been. Iran has been crippled by sanctions during the stalemate with the West over its nuclear program.
He said even if it does settle, and oil production increases, Iran does not have that much more capacity because of a lack of investment in its operations.