The oil-led Friday rebound was highlighted by a seemingly desperate “road-show” of analysts and government officials, amid suspicion from experienced or geopolitically-informed observers, who remain skeptical that any important ‘low’ is in. Now, many believe that’s the case for the S&P; but not for Oil. 

They can’t have it both ways; although we believe that even if what we had was primarily a short-covering move by Oil (because now the ‘clarification’ from the UAE also affirms that there’s no deal yet); we still believe Iran would have to limit oil production in a sort of accommodation for Russia’s ‘help’ in Syria; with the Saudi’s still remaining the key part of any end-game for oil to be well. For sure we think the downside was overdone; warned against shorting Oil, and as you know generally believe those doing so provided the buy-side for rebounds at this point; triggered by Thursday’s ‘incorrect’ news service oil deal story.

The point: the duration of the Saudi war on Oil prices isn’t sufficient to allow the return to seriously expensive oil, because production levels haven’t dropped to a level that would validate their effort to undermine foreign oil industry ‘flows’. In the case of the U.S., while almost all ‘shale’ drilling has ceased; production out of those (greater initial flush than tapering production) wells won’t drastically be lower for several more years. Hence the Saudi’s hurt our industry and jobs but didn’t drop our production levels, especially with Gulf of Mexico production just ramping ‘up’, from already drilled wells that took lots of time to come on-line. In essence the ‘hit’ from the Saudi’s impacted the Russians more than the U.S.

The stronger overall production thus means the Saudi’s would have to persist a lot longer (which some believe they intend do); but the rub is their reserves of foreign currency are being drained, due to reduced inflows of Petrodollars; far more important than a focus on some (like Iran) trying to sell in Euros. So yes, if the Saudi’s are more concerned about the ‘reserve drain’, or there is a sort of ultimatum from the U.S. regarding how their contemplated action in Syria might be viewed by Washington (presuming DC’s clever enough for a quid-pro-quo); they might reluctantly be dragged to an OPEC meeting on production cuts.