OPEC meeting could trigger higher volatility for oil-related currencies – MUFG

Analysts at MUFG Bank explained that stable oil prices has not been a key driver of oil FX performance recently. They added that a surprise from the OPEC is needed to trigger material oil FX reaction, otherwise other factors will remain key drivers.

Key Quotes

“The OPEC+ meeting on the 5th & 6th December is a key event risk next week. Our oil analyst expects the oil market to remain in significant oversupply next year. Given the expected supply glut in 2020, our projections point to OPEC+ needing to extend and deepen production cuts by a further 1m-1.2m b/d through the whole of 2020. However, our baseline scenario (60%) is for OPEC+ to decide to just rollover existing cuts for a duration of 3-9 months.”

“The price of Brent has remained relatively stable since the middle of the year excluding the temporary spike higher in September driven by supply disruption in Saudi Arabia, and is currently trading roughly in line the average over this period of around USD62/b. In contrast, oil-related currencies have been more volatile although there is no clear trend. The CAD and RUB have been amongst the best performing currencies while the NOK has been amongst the worst. The price of oil has not been a key driver of FX performance recently.”

“The OPEC+ meeting poses an event risk for oil-related currencies even if the price of oil has not recently been a key driver of performance. However, it will likely take a surprise decision to implement deeper production cuts, or alternatively to signal less willingness to continue extending production cuts to have a more material impact on oil-related currencies.”

“Deeper cuts would provide a boost for oil-related currencies such as the CAD, NOK and RUB, and vice versa. In the most likely scenario that production cuts are extended by 3-9 months it is likely that the initial impact on oil-related currencies will remain limited to modestly negative based on our assumption the price of oil could soften by USD3-5/b in the coming months. The high yielding RUB should continue to derive support from the low volatility environment.”