OPEC Pre-Game

Our sources in Riyadh continue to believe that the Saudis will push for a quota reduction of around 1.5 mb/d. The story out of Vienna early this week may be "more than 1.5 mb/d including non-OPEC" just to get a higher headline number. Also, the current view is that OPEC might make its cut effective Dec. 1, rather than Jan. 1 as OPEC President Khelil has suggested in recent weeks.

On one hand, the market knows that OPEC cannot fully implement a new quota as early as Dec. 1, but on the other hand, it would signal a more aggressive approach. This could buy the cartel some six weeks -- by the time Dec. compliance disappoints in early Jan., winter demand should provide some fundamental tightening. And Nov compliance (with the current quota) should look good in early Dec.

Bottom line: talk of 1.5+ cut, plus possible early implementation date could take WTI higher early this week, although expect many players to sell rally. No demand-side surprises expected from Monday IEA report.

Finally -- the prevailing view right now is no smart sanctions and an easy Iraq rollover -- one more reason for OPEC to get aggressive. In the unlikely event that Bush and Putin agree on smart sanctions this week, the chances of an Iraqi disruption would increase and this would complicate OPEC's plans to move aggressively this week.