Brace yourselves for tomorrow’s OPEC meeting

OPEC and its allies are expected to deliver a cut of around 1.4 million barrels a day.  Expectations are high for Saudi Arabia to lead the way forward on delivering a cut because they do not want to repeat the mistake of failing to deliver a production cut like they did in 2014.  If no agreement is reached the group could decide to meet again in February.

The 175^th meeting of OPEC takes place on Thursday and the meeting with allies occurs on Friday.  At the June 22^nd bi-annual meeting, OPEC did agree to start pumping more so that they are no longer overshooting the production limits they agreed to in November 2016.  West Texas Intermediate crude prices are off 30% from the October 3^rd high, while Brent is off 28%.

In recent OPEC meetings, the key disputes have been between Saudi Arabia and Iran.  At this meeting, the focus will be on Saudi Arabia and Russia.  Russian sources noted that Moscow could contribute a maximum of 150,000 bpd cut, but Middle East-dominated OPEC insists Russia cut by 250,000-300,000 bpd.

Will Saudi Arabia appease the US?

The relationship with Saudi Arabia and the US is complicated.  The US needs a good relationship Saudi Arabia to continue enforcing sanctions on Iran.  Saudi Arabia’s oil is needed to fill the void from Iran’s falling production due to sanctions.  The US Congress has pulled back support for Saudi troops in Yemen over the killing of journalist Jamal Khashoggi. Despite the pressures from Congress, President Trump has downplayed the Crown Prince’s involvement.  The President remains committed to keeping Saudi Arabia as an ally, but if they drive oil prices higher we could see some turbulence with that relationship.   President Trump has been clear in his desire to push OPEC in keeping oil prices low.

Recent tweets from President Trump:

November 21^st “Oil prices getting lower. Great! Like a big Tax Cut for America and the World. Enjoy! $54, was just $82. Thank you to Saudi Arabia, but let’s go lower!”

November 12^th “Hopefully, Saudi Arabia and OPEC will not be cutting oil production. Oil prices should be much lower based on supply!”

The president of the United States also has a wildcard with the Strategic Petroleum Reserves.  He could threaten to the flood the market if he was disappointed with the movement in oil prices.

Qatar leaving in January, could Iraq be next? 

Earlier on Monday, Qatar, one of the smallest countries in the world announced that they will end their 57-year membership to OPEC to focus on natural gas.  The focus will now fall on Iraq, who  has not been the most compliant member of OPEC.  If restrictions are put in place, we could see Iraq considering exiting the organization like Qatar.  If OPEC loses more members, their relevance will be questioned.  Losing a handle of the Middle East would be devastating for OPEC.

CME OPEC Watch Tool

CME OPEC Watch Tool as of 12:00 EST saw a 37.2% chance of little or no change, 62.8% chance of a small production cut and <1% chance of a significant production cut. This tool is based on options pricing and goal is to visualize the potential outcomes at tomorrow's OPEC meeting.  It uses WTI crude option data to estimate probability of price moves with the underlying future.  

Analysts expectations:

Goldman Sachs – A cut in OPEC and Russia production of 1.3 million bpd will be required to reverse the ongoing counter-seasonally large increase in inventories.

MUFG – a cut between 1.0 million and 1.4 million barrels a day curb current oversupply in the market

JBC Energy Group – They will indicate a cut of between 1 million and 1.5 million, and that will do, the market probably will stabilize.

Capital Economics – OPEC+ to agree to cut oil output by around 1.3m bpd, which should put a floor under prices.

Recent Oil Minister comments:

Oman Oil Minister stated that OPEC could agree on a 1 million barrel per day production cut; cut will be from January for 6 months

OPEC Delegate noted that some nations see a cut of under 1 million barrels per day as adequate

Russia Energy Minister Novak stated he had a good discussion with Saudi Arabia and that OPEC + has more talks ahead

Analysis:

The pressure oil prices would see from no agreement being reached should be motivation enough to deliver a production cut.  The uncertainty of production levels from Russia’s could lead to only a framework agreement being reached.  OPEC may try to push the cuts also onto Nigeria and Libya, as both have ramped up production recently.  If we see an OPEC return to 2016 oil quotas that could equate to a cut of 1.2 million bpd.

If no cut is delivered, we could see oil prices collapse along with the Canadian dollar.  Key support for WTI could come from the $50.50 level, with deeper support coming from the $42.50 to 44.50 zone.  Initial resistance lies at the $55.50 level, followed by $57.75.

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