Investors and traders are all focused on Wednesday’s OPEC meeting. This is when the 14-member cartel attempts to agree to production cuts. It is also hoped that non-OPEC producers such as Russia will join in with the action in order to boost the oil price.
David Morrison, Senior Market Strategist at Spread Co commented “The most recent betting is that an overall agreement will be reached. However, there is still no evidence that any accommodation has been reached with Iran. The country is pushing for an exemption (along with Iraq, Nigeria and Libya), yet Tehran and Saudi Arabia still appear to be at loggerheads.”
David added “There are a few possible outcomes from the OPEC meeting:
- As with Doha in April, the meeting breaks down with no agreement and bad feeling between Saudi Arabia and Iran. Effect on oil price: expect both contracts to retest support around the August lows ($40 for WTI and $41.50 for Brent).
- OPEC members (and Russia) agree to cut production. Expect oil to rally and retest resistance ($52 for WTI and $53.50 for Brent).
- But look out for exemptions (Iran, Iraq, Nigeria and Libya). If these countries are exempted, then a large production cut (say, 700,000 barrels) isn’t realistic as the burden will fall disproportionately on Saudi Arabia (which can’t afford to lose anymore income from oil exports).
- Back in April the lack of agreement hardly caused a hiccup in crude’s rally. But this time round, things could be different. Both WTI and Brent have repeatedly run into resistance just above $50
- But it’s all about compliance. Even if a deal is agreed, it’s very unlikely that everyone will stick to it. After all, OPEC members have never had a quota that they haven’t ignored.
Ultimately though, any production cut simply plays into the hands of US shale oil drillers. The US is now the world’s swing producer, and US production will increase if oil can find support above $50. Just last week International Energy Agency (IEA) Director Fatih Birol told Reuters that oil prices could come under downward pressure even if there is a cut as US shale oil producers would take advantage of higher prices to increase output. And according to Baker Hughes, the US rig count has been climbing for half a year, and now stands at 593 rigs as of 25th November, up almost 200 rigs from May. Gains in the rig count will only pick up pace of OPEC agrees to cut its output.
It’s also worth bearing in mind how things may change with a Trump presidency. Mr Trump has promised to cut back on regulations which have held back US producers. He has vowed to support the industry and expand drilling on federal land. All-in-all, this means increased US supply while the outlook for global demand growth is less certain. Looking forward, it could be that crude finds itself capped in the low to mid $50s, while support should continue to come in around $40. “