Saudi Arabia is not going to wait around. The Saudis are signaling that they will immediately cut oil output by 500,000 barrels a day while the rest of OPEC+1 will start to cut after the December OPEC Meeting. “We need to do whatever it takes to balance the oil market.” Saudi Arabian Energy Minister Khalid al-Falih and the rest of OPEC are stunned by oil recent price crash. Duped into raising production ahead of Iranian sanctions by President Donald Trump, they now realize that maybe they overreacted. The biggest run of consecutive daily sell-offs since 1984 must raise concerns not only about the  OPEC economies but the viability of shale producers as well. Even as Russian Energy Minister Alexander Novak warns that “There is a lot of volatility in the market. And what’s more this volatility could remain. Therefore, right now we shouldn’t be making any hasty decisions. We need to look at the situation very carefully to see how it will develop so that we don’t end up changing our course by 180 degrees every month.”

Of course, that is hard to do when the market changed course by 180 degrees in a few weeks. But he is right, it is likely that OPEC will cut, and it will be by too much and they may be forced to reverse course. While the U.S. has already released a lot of oil from the U.S. reserve, the supplies are only slightly above the five-year average. We will see demand start to rise as refiners have to ramp up production to meet a globally undersupplied distillate market. While we still have a glut of gasoline, we continue to be short on distillate. The truth is that they will cut too much, and we will see a shortfall. New distillate rules will cause a shortfall, plus heavier crudes that are tight right now.

Technically oil needs to see more strength to get out of its downtrend. We still believe that oil will do a v-shaped recovery, but it may want to test the lows. Look to buy calls on breaks and make sure you are hedged for distillate products because winter is here.