The Organization of the Petroleum Exporting Countries meets in Vienna on Thursday to consider whether to prolong the deal reached in December in which OPEC and 11 non-members, including Russia, agreed to cut output by about 1.8 million barrels per day in the first half of 2017.

OPEC schedule

OPEC Meeting Opens

10 a.m. in Vienna (0600 GMT, 2 a.m. ET)

OPEC, non-OPEC Meeting Opens

3 p.m. (1300 GMT, 9 a.m. ET)

Press Conference with Barkindo and Novak

5 p.m. (1500 GMT, 11 a.m. ET)

 

Oil price performance

Oil benchmarks

From Dec 10, 2016 to May 24 (Asian session)

In the last one year

Brent Oil

-1.77%

9.65%

WTI Oil

-1.55%

5.61%

 

Perception - OPEC subsidizes Shale

The first global oil output cut deal since 2001 reached in December 2016 failed to push oil prices above $60 levels. In fact, spikes to near $60 were short lived and prices actually fell to $45 levels. Experts have put the blame on the rising US shale output.

The Energy Information Administration (EIA) estimates that US crude oil production will lift 4.9% to 9.31 mbpd (million barrels per day) in 2017 and a further 7 % next year. The US rig counts have increased just over 50% since the December OPEC/non-OPEC deal.

However, the Shale producers are unlikely to replace all the proposed 1.8m/d cut to global oil supply. Nevertheless, oil prices struggled to even hold near $60 largely because there is a widespread belief on the trading floors that - a barrel of output cut by the OPEC ends up subsidizing a Shale barrel. What it effectively means that OPEC’s cut would be entirely replaced by the Shale supply.

Whatever OPEC will do tomorrow, it should be enough to change this erroneous perception. Only then the oil prices would see a sustained break above $60 levels.

Oil bearish news

Demand forecasts held unchanged: The OPEC kept its demand forecast unchanged at 1.27 mbpd. The OPEC now sees Non-OPEC supply growth of 0.95 mbpd in 2017 vs. previous forecast of 0.58 mbpd. The IEA forecast global demand growth of 1.3 mbpd in 2017, unchanged from its April report.

US plans to sell 50% of its oil reserves: President Donald Trump's proposal to sell half of the US strategic oil reserve pours cold water over the OPEC and non-OPEC’s effort to lift prices. As per Reuters report, “a release of half the oil reserve over 10 years equals about 95,000 barrels per day”. The White House proposal would also open areas of Alaska's Arctic region to exploration, potentially helping the United States further boost production.

Rouhani win seen speeding Iranian output growth: Iranian President Hassan Rouhani is in a stronger position to attract about $100bn to develop more than 50 oil and natural gas fields.

OPEC Scenarios

It is a no brainer that the entire oil sector risks downgrade and the Canadian dollar risks sell-off of epic proportions if the OPEC shocks market by not extending the output cut deal. Moreover, the likelihood of such a shocking outcome is very low.

The market pretty much expects the OPEC to extend the output cut deal by 9 months. The question here is whether it will extend the deal by 6 months or 9 months or 12 months. 

Scenario I - Oil producers extend the output cut deal by 6 months

This won’t be enough to change the erroneous perception discussed above and could lead to sharp losses in oil benchmarks, Canadian dollar and oil and commodity shares across the globe.

Scenario II - Oil producers extend the output cut deal by 9 months

A minor boost in oil prices followed by profit taking looks more likely. The Canadian dollar could follow suit.

Scenario III - Oil producers extend the output cut deal by 12 months

This will be a positive shock and could yield a sustained break above $60 levels. The Canadian dollar could enjoy big rally along with oil and commodity shares across the globe. Moreover, a break above $60 levels would at least in part revive the reflation trade.

Brent Oil Daily chart

  • A break above the falling trend line would open doors for $60 levels. Oil could jump above $60 levels in Scenario III and extend the rally to $64.00 levels. On the higher side, a major hurdle is seen directly at $72 (downward sloping monthly 50-MA).
  • On the downside, $49.75 (March low) is strong support, which if breached would open up downside towards $45.22.

Oil rally above $60 could revive reflation trade

  • The above chart clearly shows the tight correlation between oil prices and the US inflation expectations (10-year breakeven inflation rate).
  • Oil bottomed out in Jan/Feb last year as did the inflation expectations. China PPI bottomed out in July/Aug 2016 and boosted inflation expectations further. Trump victory was icing on the cake.
  • As of now, china PPI is showing signs of exhaustion. Trump trade is long gone. No wonder, the inflation expectations are at the lowest level since October.
  • Only a sustained break in the oil prices above $60 levels would revive the ‘reflation trade’. Revival of the reflation trade would also make it easy for the Fed to execute faster rate hikes and begin the process of balance sheet normalization.

CAD needs oil above $60

The CAD is already on the back foot as Bank of Canada is not seen raising rates until mid-2018. This makes the Canadian dollar and CAD denominated assets unattractive. If the OPEC fails to boost oil prices above $60, CAD could suffer sharp losses.

USD/CAD Monthly chart

  • All major averages - 50-MA, 100-MA, 200-MA are perfectly positioned one below the other. The 5-MA and 10-MA are sloping upwards as well. 
  • The RSI is nicely positioned above 50.00. 
  • The chart suggests the recovery from the monthly low of 1.3456 could be extended further towards 1.3610 and possibly to 1.38 levels if the OPEC fails to deliver a 9 month extension of the output cut deal. 
  • On the downside, strong support at 1.3262 (100-MA) and 1.3251 (50-MA) could be put to test if the major producers agree to extend the output cut deal for 12 months. The dip to 1.3262-1.3251 could be short lived as the Fed looks set to hike rates by 25 basis points in June. 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news

Latest Forex Analysis


Latest Forex Analysis

Editors’ Picks

EUR/USD hovers around 1.1350 as investors ignore yields

US Treasury yields reached fresh weekly highs but fell short of underpinning the greenback. EUR/USD firmly advanced to a fresh weekly high, although a substantial advance is still unclear. 

EUR/USD News

GBP/USD plummets to fresh 2021 lows sub-1.3200

The greenback recovers its poise as the mood partially sours, sending GBP/USD to its lowest since December 2020. Impending Brexit risks and rising covid cases in the UK weigh on the pound, fueled by persistent uncertainty about the Omicron variant.

GBP/USD News

Gold: Greenback slides and offsets rising US yields

Gold is flat and sideways in consolidating markets awaiting a catalyst. Gold is consolidating in the $1,779 and $1,793 range with markets trying to assess the outlook with regards to inflation, central banks and the uncertainty surrounding the Covid-19 variant.

Gold News

Cardano price in phenomenal buying zone as ADA targets $3

A brief technical and on-chain analysis on Cardano price. Here, FXStreet's analysts evaluate different patterns and indicators that suggest ADA is primed to advance further.

Read more

Cyber Monday 2021 Discounts!

Glued to your trading screen on Cyber Monday? Upgrade your skills by signing up for FXStreet’s Premium service, offered at a discount of up to 50%. Fellow traders have already taken advantage of Black Friday profits. What about you? 

Subscribe now!

Majors

Cryptocurrencies

Signatures