John J Hardy
Saxo Bank’s head of FX strategy John Hardy takes a closer look at trends and moves in today’s forex charts, including EURUSD, USDJPY, AUDUSD, and EURSEK.
Article / 27 November 2017 at 13:43 GMT

Opec walking a tightrope into Thursday's meeting

Head of Commodity Strategy / Saxo Bank
  • Oil has rallied 20% since early Oct on output cut, geo-risks and burst pipeline
  • Opec and Russia are expected to announce a 6-9 month output cut extension 
  • A failure to deliver a robust message could send the price sharply lower

 Opec needs to get its messaging straight in order to avert a price slide. Pic: Shutterstock

By Ole Hansen

An expected output cut extension combined with geopolitical risks and a recent Canadian pipeline disruption have all helped support crude oil's 20% rally since early October. In order to support the price and the continued process of balancing the global oil market, Opec and Russia are widely expected to announce a six to nine month extension when they meet in Vienna this Thursday. 

The combination of a near-record fund long in oil which needs to be fed bullish news in order to be maintained and signs of a pick-up in US production have, however, left Opec with a very delicate task of delivering the result without triggering a price correction. If they tighten the market too much, thereby supporting additional price gains, they risk slowing demand while providing further support for the US shale industry. 

A quick glance at the below table shows why Opec and its non-Opec friends need to keep its 1.8 million barrels out of the market for at least another year. The current gap between world demand growth and non-Opec supply growth only leaves room for Opec to make a small expansion of around 200,000 barrels/day next year. These barrels could, stability permitting,  be provided by Iran, Nigeria or Libya, all of which are currently exempt from the production cut deal. 

Expectations for oil supply and demand

One of the events which helped trigger the latest run up in oil prices back in early October was the temporary loss of supplies from Northern Iraq after Iraqi forces retook KRG-controlled territory around the oil rich city of Kirkuk. Bloomberg reports today that oil flows from the region to the Turkish port of Ceyhan which had been averaging just 240,000 barrels/day, have now doubled to 480,000 barrels/day. 

The cartel will also be worried about the potential production response from US shale oil producers. The 20% rally since October has led to a reversal in the number of oil rigs. In the past three weeks US drillers added back half of 39 oil rigs that were pulled during the previous three months. US oil production, according to weekly estimates, has reached a record 9.66 million barrels/day after surpassing the previous record from June 2015. 

US crude oil production and rigs
Higher oil prices risk negatively impacting the otherwise robust outlook for 2018 demand growth, not least from China and the US, the world's two biggest consumers. China as it reduces purchases towards strategic reserves and the US from lower gasoline consumption as higher prices begin to bite. 

During the past couple of weeks hedge funds have been cutting bullish Brent crude oil bets from a record 543 million barrels. The reduction has primarily been driven by longs being reduced with no signs yet of short sellers showing any interest in increasing exposure. Data covering speculative positioning in WTI crude oil and products will be released Monday after the US close.  

Speculative positioning in Brent Crude oil
Opec will convene on Thursday and conclude that the medicine of cutting supplies has started to cure the patient. The job, however, is probably only halfway done and several more months of constraint together with robust demand is needed before they can start to turning up the taps again. 

How they handle the delicate task of sending a robust message of unity and prolonged restraint will determine whether funds will continue to support the idea of higher prices. Having bid the market up for several months in the belief that production cuts would be extended, the short-term risk to oil looks skewed to the downside unless an unexpected positive surprise can be delivered. 

Brent crude oil, first month cont.
Brent Crude oil, first month cont.

Source: Saxo Bank

A nervous trading week lies ahead. 

– Edited by Clare MacCarthy


Ole Hansen is head of commodity strategy at Saxo Bank

Any remote chance of Russia join OPEC?
Ole Hansen Ole Hansen
No I think they are very happy about being able to decide their own agenda. Production cuts have served them well but at the same time several domestic producers are growing uneasy about keeping production suppressed for much longer.


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