Intraday Market Thoughts

What's at Stake in Vienna

by Adam Button
Nov 29, 2016 23:42

The long-anticipated OPEC meeting takes place Wednesday and a deal is a 50/50 bet. We look at the implications for oil prices. The New Zealand dollar was the top performer while the yen lagged. Below is the video for Premium subscribers, covering FX, indices, gold, silver and US crude as well as existing trades.

A month ago, OPEC ministers were talking about this meeting like it was a done deal but it's quickly unraveled. Oil prices fell nearly 4% on Tuesday after rumblings and discord. The main sticking points are Iran and Iraq. Iran is attempting to recover from sanctions that were lifted early this year and Iraq wants extra room to produce because of losses in ISIS-controlled areas.

Iraq wants to produce at its October level of 4.55 million barrels per day and OPEC wants a 200K bpd cut. Iran wants to get close to 4 mbpd but OPEC is pushing for a quota around 3.8 mbpd.

Iran has pushed back and asked Saudi Arabia to cut to 9.6 mbpd from 10.5 mbpd in October. That sounds like a hefty sacrifice but Iran argues that Saudi Arabia is producing beyond its current capacity and that a drop to the Saudi-proposed level of 10.1 mbpd would happen without a 'cut'.

Overall, OPEC is looking for 1.2 mbpd in cuts from October levels.

So what happens if a deal falls apart?

The Sept/Nov lows of $42.60/$42.15 are the first main line of support. That will be challenged and will likely break. Next will be $40 and the August low of $39.19.

WTI crude could easily fall further but it partly depends on how the failure occurs. If it ends in total discord and finger-pointing with hints at a battle for market share, the downside could be $35 or lower in time. If it ends with a constructive tone and talk of another meeting/freeze in January then $40 is likely to hold.

A deal coming together remains a strong possibility. Logically, OPEC has nothing to lose by making an agreement even if they intend to flout the quotas. All member nations have a long history of doing exactly that. What's preventing it is the public grandstanding and petty squabbles between fierce rivals but it's certainly in everyone's interest to put it aside.

If that happens and a quota that cuts 1.0-1.2 mbpd is agreed for six months starting in January (as rumored), expect a rally in oil. The quota may be announced as a total number at 32.5-32.7 mbpd.

The market reaction might be less-dramatic than a breakdown but the kneejerk will still be +$3 and challenge the November high of $49.18. Beyond that is the October high of $51.93 but there is also the risk of a 'sell the fact' type of reaction where any rally is fleeting.

Whatever happens, the momentum is likely to last for at least a few days. There is one trade in US crude for Premium subscribers, alongside 6 other trades in FX, equity indices and commodities.


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