20 July 2017
The doubts that OPEC can maintain its supply-cut deal are turning into a certainty. The International Energy Agency's June report shows that OPEC members turned on the taps and pumped far more than expected. There was a surge in production from several OPEC members, including Saudi Arabia, bumping up the cartel’s output by 340,000 barrels per day. Brent Crude felt the headwinds and was anchored at $47.9 per barrel in wake of the development.
Investors are also raising eyebrows at the Nigerian oil minister's decision not to attend the July OPEC meeting in Russia. It seems that the African Petroleum Producer's Association (APPA) has a meeting on exactly the same day. At such a critical juncture of OPEC's negotiations the question is whether Nigeria's absence is a snub or coincidence? Whatever the case, it adds to gathering doubts that the cartel can extend its already fragile agreement. It seems to indicate that Nigeria has already decided to have no part of the supply cut deal.
Fragmentation within OPEC poses a risk that needs to be priced into investments. Nigeria has paid a high price for the weak oil market. Coming on top of the financial pain over the last three years, Nigeria's signals are being carefully watched. Among the non-OPEC countries taking part in the supply cuts, Russia is signaling it is against renewing the deal. This may be a negotiating tactic, but investors aren't impressed. It's just factored in with the other doubts piling up, so traders are pricing it in as a below-$50 buy for the time being.
Meanwhile, US producers are still flooding the market, adding to the global supply of 720,000 barrels per day in June. Global supply now stands at 97.46 million barrels per day. The IEA has raised its full-year forecast for demand by 100,000 bpd to 98 million bpd. So, let's call it roughly breaking even for the rest of the year, meaning that the price has little impetus to trend up or down strongly before the end of summer. This is a strong argument if you keep in mind the overflowing stockpiles.
In another scenario, there are a couple of hot spots I'm watching for risk reasons. Venezuela's economy and political system is in crisis, and if there are any escalations there could be a knock-on effect on the oil price. Added to that are the tensions simmering away in Azerbaijan. There may be a spike in the oil price if either of these get out of control, possibly even as high as $60-$80 per barrel.
All eyes will be on the OPEC meeting in Russia in July. If there is cause for optimism, oil could rally over $50 per barrel, in spite of the fundamentals. And depending on how convincing OPEC ministers are about committing to supply cuts, the potential rally could be sustained through much of August. The opposite also holds true. If Russia and Nigeria turn a cold shoulder, and the crisis with Qatar isn't resolved, then the oil price could stay pressured. The prospects of crude staying below $50 per barrel until September wouldn't be welcome, at least to those oil-producing countries which need the revenues. Investors would do well to price in their doubts and stay alert to signals from Nigeria, Russia and Saudi Arabia.
Disclaimer: The content in this article comprises personal opinions and ideas and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability as to any loss arising from any investment based on the same.
Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose, it is possible that you may lose more than your initial investment. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice.
Any opinions expressed here are the author’s own.
© Opinion 2017
The doubts that OPEC can maintain its supply-cut deal are turning into a certainty. The International Energy Agency's June report shows that OPEC members turned on the taps and pumped far more than expected. There was a surge in production from several OPEC members, including Saudi Arabia, bumping up the cartel’s output by 340,000 barrels per day. Brent Crude felt the headwinds and was anchored at $47.9 per barrel in wake of the development.
Investors are also raising eyebrows at the Nigerian oil minister's decision not to attend the July OPEC meeting in Russia. It seems that the African Petroleum Producer's Association (APPA) has a meeting on exactly the same day. At such a critical juncture of OPEC's negotiations the question is whether Nigeria's absence is a snub or coincidence? Whatever the case, it adds to gathering doubts that the cartel can extend its already fragile agreement. It seems to indicate that Nigeria has already decided to have no part of the supply cut deal.
Fragmentation within OPEC poses a risk that needs to be priced into investments. Nigeria has paid a high price for the weak oil market. Coming on top of the financial pain over the last three years, Nigeria's signals are being carefully watched. Among the non-OPEC countries taking part in the supply cuts, Russia is signaling it is against renewing the deal. This may be a negotiating tactic, but investors aren't impressed. It's just factored in with the other doubts piling up, so traders are pricing it in as a below-$50 buy for the time being.
Meanwhile, US producers are still flooding the market, adding to the global supply of 720,000 barrels per day in June. Global supply now stands at 97.46 million barrels per day. The IEA has raised its full-year forecast for demand by 100,000 bpd to 98 million bpd. So, let's call it roughly breaking even for the rest of the year, meaning that the price has little impetus to trend up or down strongly before the end of summer. This is a strong argument if you keep in mind the overflowing stockpiles.
In another scenario, there are a couple of hot spots I'm watching for risk reasons. Venezuela's economy and political system is in crisis, and if there are any escalations there could be a knock-on effect on the oil price. Added to that are the tensions simmering away in Azerbaijan. There may be a spike in the oil price if either of these get out of control, possibly even as high as $60-$80 per barrel.
All eyes will be on the OPEC meeting in Russia in July. If there is cause for optimism, oil could rally over $50 per barrel, in spite of the fundamentals. And depending on how convincing OPEC ministers are about committing to supply cuts, the potential rally could be sustained through much of August. The opposite also holds true. If Russia and Nigeria turn a cold shoulder, and the crisis with Qatar isn't resolved, then the oil price could stay pressured. The prospects of crude staying below $50 per barrel until September wouldn't be welcome, at least to those oil-producing countries which need the revenues. Investors would do well to price in their doubts and stay alert to signals from Nigeria, Russia and Saudi Arabia.
Disclaimer: The content in this article comprises personal opinions and ideas and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability as to any loss arising from any investment based on the same.
Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose, it is possible that you may lose more than your initial investment. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice.
Any opinions expressed here are the author’s own.
© Opinion 2017
