It is up to OPEC again

by: Hans van Cleef

After the dramatic sell-off seen over the past few weeks, markets are now testing the lower band of the upward trend channel (see graph below)

We have seen several comments from OPEC members (mainly Saudi Arabia). Those hint at a change in OPEC policy. A production cut would be needed to balance the market (read: push prices higher). On the other hand, US president Trump is calling for higher OPEC production in order to meet demand and push prices even lower. These comments are counterbalancing each other and market participants seem to be affected by both arguments. Currently this results in more or less sideway trading just above the lows set last week.

 

 

Investors who are bearish look at the rise in US inventories as well as the OPEC’s call for less production in the near term. Both signal oversupply in the near term which would justify lower oil prices. The bulls in the market are more looking at the IEA warnings of a lack of investments in the sector, the low OPEC spare capacity as well as the expected continuous rise in global demand. The uncertainty in the oil markets, but surely also the negative sentiment in equity markets triggered a strong selloff in speculative long positions while short positions were increased, but not too much (see graph for net positions).

Net positions outstanding contracts

Source: Bloomberg

The upcoming OPEC meeting at 6 December will be crucial for oil price direction in 2019. Although OPEC hints at lower oil production, this may prove to be ‘forward guidance’ in order to signal to the market that it clearly does not like current low oil prices. Question is whether they would actually cut production, especially since Russia is not in favour. Sticking to its original agreement of a production cut of 1.2 mb/d may be enough to stabilise the market. Besides that, if we look at the production forecast for 2019 I see limited room for more oil production coming to the market. In fact, there could be a shortage in the course of 2019 already. As a result, it will be a challenge to meet the continuous rise of global demand for oil, even if Iran sanctions have only a limited effect and the extra US oil supply would find a way to the global markets. The latter is not expected though: Iran exports will continue to decline (despite the waivers) and bottlenecks in US infrastructure will not be solved before the end of 2019.

So, the near term sentiment is clearly negative. During the coming weeks we may continue to test the lows within a smaller sideway trading range, but final direction towards the end of the year and into 2019 must be found in OPEC policy.