In recent years the Opec meetings have been something of an anti-climax, barely worth traders’ attention. However, after a near 30% decline in oil prices since peaking in June, this week’s meeting, which concludes on the 27th, could determine whether the oil price makes a recovery or if it falls further.
The meeting:
Most of Opec’s oil ministers will start arriving in Vienna on Wednesday. Although no meetings are scheduled for this day, expect headlines to come out as the world’s oil press descend on ministers’ hotels hoping to get a quote about what they are thinking ahead of the meeting. Obviously any comments from Saudi Arabia are worth watching as they are the largest producers in the Opec cartel. However, due to the sharp decline in prices it is worth looking out for any comments from members in Africa, especially Nigeria, and South America, especially Venezuela, who need oil at approx. $100 per barrel to balance their budgets. On Thursday the ministers have an all-day meeting that will culminate with a press conference at approximately 1500 GMT/ 1000 ET.
The press conference:
The market will be waiting to see whether 1, Opec agrees to cut production and 2, if they do agree to cut production, by how many barrels per day. Experts are fairly undecided as to what to expect from this meeting, with some arguing that it is not in Saudi Arabia’s interest to cut oil production, as a lower oil price could hurt US Shale oil production, thus boosting Opec’s grip on the oil industry in the long term. We believe that there are three potential outcomes from this week’s meeting:
1, Opec agrees a small cut to production.
Currently Opec is producing 30.25 million barrels per day, which is above their quota of 30 million barrels per day. If the Cartel wants to placate some members who are experiencing economic stress as a result of the slide in oil prices, they could cut production by 250,000 barrels and bring production down to their quota of 30 million barrels per day. This is unlikely to cause too much reaction in the oil price; we would expect to see further medium-term losses.
2, Opec does not cut production
If this happens then it would suggest that Saudi Arabia has got its way and, if you believe in conspiracy theories, US shale oil and gas producers had better watch out. This could trigger a sharp decline in the oil price, with $75 and $70 in view for Brent crude and WTI, respectively.
3, Some members make large cuts to production
As we mention above, some members including Nigeria and Venezuela struggle when the oil price falls, and they need the oil price to be around the $100 per barrel mark to make ends meet. Due to this there is a risk at this meeting that some members go rogue and decide to cut production if Opec decides to remain on hold. This could be counter-productive, as other members simply ramp up production to meet the target; however desperate times call for desperate measures. The impact of this outcome on the oil price is harder to predict. If more members decide to cut production unilaterally then we could see the oil price fall, whereas, one or two producers cutting production may not have much of an impact on the oil price.
Overall, when it comes to Opec Saudi Arabia is key. If it decides to cut production then the oil price could attempt to recover, whereas if it decides to do nothing, then the price of oil could fall further in the coming days.
The impact on the US
Some people have wondered whether the fall in the oil price could impact the US shale oil revolution as it is considered more expensive to produce compared to other forms of extracting oil. However, research produced by Societe Generale, suggests that the break-even price for Shale production is $60-$70 per barrel, so the industry could survive even if oil falls further. In our view, the US, who currently produces 4 million barrels of oil per day, is likely to stay energy independent for some time.
What could boost the oil price?
The economic reasons behind the decline in the oil price are unlikely to go away any time soon, thus even if Opec does cut production this week, it may not trigger a long-term recovery in oil prices. Weaker demand for oil is one of the key reasons why the oil price has declined. The Energy Information Administration in the US recently cuts its 2015 forecasts for the price of oil, alongside demand projections for next year. It estimates that 2015 oil demand is expected to be 92.5 million barrels per day, down from 92.71 million in its previous estimate, whereas oil supply is expected to continue to grow to 92.91 million barrels per day, from 92.67 million.
The slowdown in Europe and China is also taking its toll on energy demand, and unless these economies pick up quickly, which they are not expected to do, then demand for oil could remain subdued for some time.
The other factor weighing on the oil price is the stronger dollar. Although the link between the dollar and oil is not straight forward, the IMF suggests that a 1% increase in the dollar triggers a 1.13% decline in the oil price. We believe that the dollar has started a long-term uptrend, which could hurt the oil price for some to come.
The technical picture:
After falling to a low of $76.76 on 14th November, the Brent crude price has attempted to make a recovery, however, it is still struggling to make any headway above $80.00, and it is still below the high of the month so far above $86 bbl.
We expect Brent crude oil to oscillate around the $80 mark until we know the outcome of the Opec meeting on Thursday. As we mention above, a significant cut to production could trigger a sharp drop back to the November lows, and open the way to $70 bbl.
Other risk events to watch for this week include the second reading of US Q3 GDP and the flash estimate of Eurozone CPI for November. If both of these come in on the weak side then it could trigger some downside in the price of oil.
From a currency perspective, oil producing nations could see their currencies outperform on Thursday if Opec does cut production. This includes the CAD and the NOK. Now that the US is a producer of note, a cut in production could also have a short-term positive impact on the dollar.
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