Financial market research and analysis

On June 22nd and 23rd, energy ministers from the OPEC (Organization of the Petroleum Exporting Countries) and ministers from countries outside the organisation will meet in Vienna to discuss future oil policy.

Analysts and oil traders are speculating to what extent this meeting will affect oil prices. The meeting will address many issues especially rising U.S. oil output, supply disruptions in countries such as Venezuela, Libya, Angola, and Nigeria, and American sanctions in Iran.

Saudi Arabia, the largest and most influential OPEC oil producer, will need to keep in mind more than just the current and future oil situation. It is important for them to take into account their relationships with Russia and the U.S. – not to mention to deal with increasing tensions with Iraq and Iran.

What action might be taken?

The main issue will be to decide whether to increase oil production, or to maintain the supply level as it currently is. Saudi Arabia and Russia have said they are ready to increase the level of oil production. This would enable them to maintain market share and appease the White House.

Most of the other countries – especially poorer ones – wish to leave the oil production at current levels, which, with supply shortages from many large oil producers, may lead to upward pressure on oil prices, helping them meet their national budget spending requirements.

Given this increase in demand, OPEC may very well decide to raise its production quotas to meet these increasing energy needs. A decision to remove any kind of production limit seems unlikely. Any kind of increase in oil production would need to be “limited and gradual” in order to avoid causing a negative price shock.

Short-term market reaction

Crude prices have dropped more than 10% from the highs in May, as the market priced in signals from Saudi Arabia and Russia that they were willing to lift output curbs.

The decision by how much to raise total oil output will be the key determinant for oil price direction on Friday. Russia had earlier touted raising output by 1.5M bpd. Rumours that OPEC might compromise by raising production by 600,000 per day (approx. half way between 1.5M and nothing) was well received by the market.

We think raising output by 600,000 bpd or less would create a positive price move in the short term for oil prices, whereas anything close to 1M bpd would see a negative price reaction.

Longer-term effects

Since November 2016, OPEC’s and other large oil producers’ oil production limit has helped to reduce the global oil glut and support oil prices. After falling to about $30 a barrel in early 2016, oil prices have recently reached around $80 (Brent) and $72 (West Texas Intermediate) a barrel – their highest levels in 2 years.

In addition, recent developments such as Chinese tariffs on U.S. goods (including crude and gasoline) are also putting upward pressure on oil prices. Now that the global economy is stronger, the demand for fossil-fuel energy is increasing, with the International Energy Agency expecting demand to grow by 1.4M bpd in 2019.

Still, as long as OPEC does increase output, we see an eventual larger pullback toward $70 per barrel for Brent crude.

Equities and Forex

Naturally, decisions from OPEC influence not only oil prices, but also companies within the overall Oil & Gas sector, who extract, refine and sell oil-based products – not to mention related sectors such as agriculture, transportation, and manufacturing. As the cost of extracting oil stays constant, lower oil prices put a strain on profitability, potentially leading to layoffs and a restriction on exploration and infrastructure projects. The swing in oil prices strongly affect economies heavily dependent on oil exports (such as Norway, Saudi Arabia and Canada) as well as their related currencies.

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