OPEC: Risk that OPEC/Russia may fall short of market expectations - MUFG

Analysts at MUFG suggest that today’s OPEC meeting is one of the final key event risks for financial markets heading into year end and has the potential to be market mover for the foreign exchange market.

Key Quotes

“Market participants have become more optimistic over the potential for an OPEC/non-OPEC extension to the current production cut deal. On balance, we judge that risks to the price of oil are skewed to the downside from next week’s OPEC meeting. We believe that there is a growing risk that OPEC/Russia may fall short of market expectations at next week’s meeting.   

“We highlight two likely scenarios from OPEC meeting:

1. Our base case scenario is that producers remain cohesive and unreservedly will extend their 1.8 million barrels/day production cuts by 9 months. However, the likelihood that the announcement of a 9 month extension is deferred until 2018 should not be ruled out. Russian Oil Minister Alexander Novak has already stated that he wants to use the next 3-4 months to judge the pace of supply-demand rebalancing. A 9month extension at the current juncture could prove overzealous when oil prices are rallying hard and inventories are racing towards their 5year average levels.
2. The main downside scenario for the price of oil would be if OPEC decide to make no rollover announcement. OPEC views its decision on the extension of production cuts as finely balancing several unknown factors. A renewal would require continued participation from non-OPEC countries, signs that inventory correction is taking course and some assurance that the shale oil production rebound would remain contained. We view that OPEC is unlikely to renew the agreement if  it came to the conclusion that the accords was setting it up for  a course of permanently lower market share where it would in essence subsidise shale production.”

“Whilst our base case assumes that OPEC will rollover on the 30th November for 9 months, we view that anything short of this will likely be a disappointment to markets in which the price of oil could retrace sharply lower. OPEC members have been using forward guidance to signal that another extension is likely which has helped to offer support for the price of oil. However, it also poses the risk of a more abrupt adjustment lower for the price of oil if the forward guidance is not backed up by action at next week’s OPEC meeting.”

“There was some initial disappointment following the last OPEC on the 25th May 2017. On that occasion, the price of Brent and WTI both declined by around 19% from intra-day highs on the 25th May to intra-day lows on the 21st June.  The initial sell off proved relatively short-lived. Brent and WTI have since fully recovered the lost ground and now both stand around a fifth higher than levels recorded just before the last OPEC meeting.”