31 October 2016 at 13:49 GMT
- The weekend meeting of Opec did not deliver as expected
- Failure to deliver now carries the risk of sending the price lower by another 10-15%
- Break below $48.35 on WTI today has increased the risk of a test towards $46/b
- We still expect some kind of deal to be hammered out
- Read to the end of the article for a list of key dates in November
Opec production cuts aren't a piece of cake - even if negotiated in beautiful Austria. Photo: iStock
By Ole Hansen
Opec's announcement on September 28 to replace verbal support by action in order to support the rebalancing process helped trigger a 15% rally in oil and the biggest speculative buying surge on record. Worrying signs however that the cartel may struggle to deliver what has been promised has seen oil drift lower during the past couple of weeks.
The technical meeting in Vienna at the weekend was supposed to sort out the details about who was going to cut and by how much. In the end the meetings, which at one point also included non-Opec members such as Brazil, Kazakhstan and Oman ended in failure with Saudi Arabia and its closest Gulf neighbors now increasingly forced to carry the burden of cutting.
Without Iraq and Iran at a bare minimum agreeing on a freeze the risk of failure has increased with Saudi Arabia being reluctant to hand over more market share. Despite a 6% reduction in bullish bets hedge funds were net-long 646 million barrels on October 25. An elevated position this size needs both technical and fundamental news to be maintained and both of these drivers are currently deteriorating.
The break below $48.35 on WTI crude oil today has increased the risk of a test towards $46/b, the trend-line support from the low back in February.
Source: Saxo Bank
Verbal intervention has been Opec's best and most effective weapon against price weakness in recent months but having promised action a failure to deliver now carries the risk of sending the price lower by another 10-15 percent. Opec members are fully aware of the cost of failure and the prolonged impact this will have on prices recover to the preferred $55 to $60 area.
On that basis we still expect some kind of deal to be hammered out but whether it will do much to speed up the rebalancing process and support the price much beyond the current range remains to be seen.
Key November dates (Source: Bloomberg)
Nov 1 to 2: Opec governors meet in Vienna
Nov 10: IEA’s monthly report with demand, supply estimates
Nov 11: Opec’s monthly report with secondary source production estimates for October that might be used as baseline for reductions
Nov 17: Gas Exporting Countries Forum summit in Doha providing a chance for Opec and non-Opec nations to meet
Nov 25-26: Opec and non-Opec officials hold more consultations in Vienna
Nov 30: Policy-setting OPEC ministerial conference in Vienna
— Edited by Clemens Bomsdorf