27 September 2016 at 9:18 GMT
- Oil markets volatile in run-up to Algiers summit
- Saudis offers cutback in exchange for Iranian freeze
- Tehran less dependent on crude revenues than Riyadh
All eyes are on Algiers as the battle for an oil deal rages on
ahead of tomorrow's summit. Photo: IStock
By Ole Hansen
Crude oil continues to whipsaw as the informal meeting between Opec members in Algiers on Wednesday approaches. Hopes of a deal have been rising and falling during the past week and the almost binary nature of the outcome has triggered rising volatility with call options seeing the biggest demand.
Saudi Arabia has offered to cut production back to January levels in exchange for Iran freezing production at current levels. Iran produced in the region of 3.6 million barrels/day in July and August. In response to this, Iranian oil chief Bijan Namdar Zanganeh has said that Iran is not looking for a deal to be made in Algiers as it is not willing to freeze oil output before reaching a market share of 12% to 13%, or more than 4m b/d.
Iran's dependency of oil revenues as a share of its national budget is much lower than Saudi Arabia's. On this basis, Iran is negotiating from a stronger position than the Saudis where deep cuts are being introduced to rein in spending amid an oil price slump which undoubtedly has lasted much longer than expected.
The oil market has well and truly once again been taken hostage to soundbites from major oil producers. The chance of a deal seems to be fading once again and with that, there comes the risk of markets turning their attention to the continued overproduction and overhang of supply.
Saudi Arabia has even been reported as saying that the differences between the Kingdom and rival Iran remains too wide to secure a deal.
Money managers increased gross short positions in futures market by 50% during the week to September 20 and this left the net-long at the lowest level since July. During the same time, the options market has seen increased demand for call options as a potential hedge to protect the upside from a deal.
With the latest news from Algiers, call options could be hit once the market opens in earnest later today.
The top 10 most traded options strikes during the past five days up until yesterday shows the above trend with the three most popular strikes during this time all being calls. Not least the $50 strike expiring on October 17. Also the December $60 call has received heightened attention.
With a "no deal" outcome the market is once again at risk of having to test the strength of support. A face-saving white rabbit can still be pulled from the hat, but failure is likely to attract renewed selling. Not least considering recent developments with rising production from Nigeria, Libya and Russia.
Adding to this we have the expectation of rising US inventories over the coming weeks as the technical down adjustment last week begins to fade.
A "no deal" without offering the opportunity of a fresh look at the November Opec meeting could see Brent crude oil challenge support at $45/barrel with a break below signalling the potential of a technical extension towards $40/b.
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Source: Saxo Bank
— Edited by Michael McKenna
Ole Hansen is head of commodity strategy at Saxo Bank