Please see the following analysis from Chris Beauchamp, Chief Market Analyst at IG, a global leader in online trading.
OPEC faces a difficult task this week, as it aims to prop up the oil price without antagonising the US or putting too much strain on state finances by cutting production too much.
The current state of demand and supply
After being in deficit for 2018 and 2019, the oil market is expected to shift back to surplus next year:
Crude output continues to rise despite the decline in Iranian output:
Crude oil seasonality
Usually oil weakens in the first two months of Q4, but it then tends to pick up from the first half of December, beginning a steady rally into the summer.
Current forecasts suggest a cut of 1.4 million barrels per day will result from the meeting. Anything less than this would likely cause another drop in prices. The meeting may not go with an explicit number, merely creating an agreement to restrict supply. Again, this is unlikely to be well-received by the oil market.
Saudi Arabia – walking a tightrope
Saudi Arabia faces a difficult balancing act. On the one hand, it must avoid letting the oil price fall too far and hurt its finances (and those of the others in OPEC, though that is less of a concern). On the other, it will seek to avoid cutting too far, too fast, since this might lead to a sharp bounce in the oil price, which would annoy the White House.
Saudi Arabia knows that it has outraged world opinion with its actions regarding Jamal Khashoggi, and that only the lack of outright condemnation from the US has saved them from serious consequences. Trump’s decision to equivocate on the subject, while not conditional on keeping oil prices down, may waver if they cut output by a significant amount.
But then again, with a defence budget running at 10% of GDP (almost five times the global average and three times the US budget in GDP terms), plus large state spending commitments, Saudi Arabia has to look at some cuts in order to restore balance to its finances.
The FT reports that the Saudi energy minister has argued that cuts of at least a million barrels per day are needed.
Although not an OPEC member, Russia is Saudi’s other major partner in the oil market. Russia too is caught between wanting to boost prices and keeping its oil wells going at full production. Putin is aware that falling oil revenues put pressure on the Russian state, at a time of austerity for the Russian economy. Recent attempts to raise the pension age have not gone down well, and the president faces falling opinion poll ratings. Russia is arguably happy with the current state of affairs, but may be persuaded of the benefits of cutting production in return for higher prices.
A smaller than expected cut, however, might have the opposite effect, sending prices lower and resulting in lower output for Russian wells. This would not go down well in Moscow.
The rest of OPEC
Saudi Arabia could look to persuade other members to cut production. Nigeria and Libya were left out of the last round of cuts, due to the fact that their output was still recovering after shocks arising from political troubles.
But both are keen to keep producing to boost state revenues, while others like Iraq and Iran are also rather cool on the idea of reducing output.
Saudi Arabia faces a tough task convincing the rest of the cartel to cut output, particularly if it does not set out its own production cuts.
All trading involves risk.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading Spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.
Prepared by IG Markets Ltd.