What to expect from today’s Opec meeting in Vienna

02 июня 2016, 15:25

Question: What do you expect will be discussed at the OPEC meeting?

Answer: As this is the first meeting of the new Saudi Energy minister Khalid al-Falih, hopes have been raised that an attempt to show unity will be made. This is after the previous Opec meeting and the April Doha meeting both ended in failure and it laid bare the disagreements, especially between Iran and Saudi Arabia.

Prior to the meeting there has been a feeling that this meeting was going to be irrelevant. No decision was expected, as no decision was required. The market focus has shifted away from Opec towards declining production in the U.S, while major but temporary supply disruptions in Canada, Nigeria and Venezuela helped balance the market during May. These events helped drive the price higher than what was otherwise warranted at this stage of the recovery. 

With the price of oil having returned to $50 there is a big question about how much further oil can rally from here without inviting high cost producers back to the market. With global inventories still very elevated, a sooner than expected stabilization of US production may be more than the market can cope with at this stage.

Q. To what extent will the meeting impact oil price?

A. On that basis Opec will try to show unity but at the same time refraining from initiatives that would drive the market higher thereby risking ruining the gradual and longer term sustainable recovery. The introduction of a production limit will not have a fundamental impact but could still be short term bullish considering the recent failures.

Q. What is the outlook for Brent and WTI in 2H 2016?

A. In the short-term we see both WTI and Brent crude maintain the established trading range between $45 and $50. Depending on what kind of demand we will see across the Northern Hemisphere and especially in the US this summer we should see oil continue its ascent as we approach year-end. This should leave both oils trading within a $50 to $55 range by year-end. In 2017 the price should continue its ascent, albeit at a slower pace than what we have seen this year. We currently expect Brent to trade no higher than $65 by the end of 2017.

Q. What are the key factors affecting the oil market? Any chance oil price will drop again?

A. Major supply disruptions was the main driver behind oils additional gains during May. Some of these will extend into June thereby providing support. Against this, the market will be watching closely the developments in US production. The sharp rally in crude oil during the past three months may slow the production decline and if we see a reversal it may have a short term negative impact on prices. This would return the focus on Opec producers who have continued to increase production in recent months.

Other important factors will be the US FOMC decision on rates and the potential impact these decisions will have on the dollar.

Violence in Libya and Venezuela where production is struggling to be maintained as the country moves closer to the abyss will be watched closely as well.

In the US the demand for gasoline and refinery margins into the summer driving season will be a key as well given its potential impact on oil demand and the ability to bring down inventories from an 80 year high.

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