Concerns
that OPEC and its non-member allies will increase production for the first time
since late 2016 is a major contributor behind the sharp selling of Oil in
recent weeks. Back in late 2016, OPEC famously announced production cuts in a
desperate measure to reduce the volume of oversupply in the market, the major
catalyst behind Oil falling from above $110 to below $30 between mid-2014 and
early 2016. Speculation that OPEC could now reposition its strategy in the
opposite direction has encouraged WTI Oil to decline nearly $10 in less than a
month.
Anticipation
of a drastic shift in OPEC’s mindset is quite puzzling to most when you
consider that the previous theme heading into meetings was how much production
output could possibly be cut from the market. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html
This focus has suddenly been replaced with anxiety over how much supply could
potentially be added back into the market. This suggests that there has been a
rebalancing after years of an overwhelming oversupply of the commodity;
equally, it could also point to underlying concerns that have been evident for
some time, that some members no longer wish to comply with OPEC’s production
cut deal.
Either
way there is a shift in play, with previous global demand-side concerns being
substituted to specific supply-side actions where the market is now expecting
an increase in production. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html
The recent price action in the Oil markets suggests that investors are
confident that OPEC will announce an increase in production output, but we do
not expect that it will be to the degree that articulates WTI falling $10 in
less than a month. The commodity is at risk to being oversold as the OPEC
get-together commences and could be in line for a rebound.
A hike
in production output has already been priced in, but we are not ruling out a
modest rebound over the upcoming trading sessions as the exact increase in
production volume remains to be seen. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html
There is a risk that traders are expecting a little bit too much heading into
the meeting and could reshuffle their positions upon speculation that OPEC will
not increase production to the amount currently being priced in by the market
between 500,000 to 1 million barrels a day. After all, it did take a very long
time to persuade OPEC committee members to agree to the historic production
cuts all the way back in 2016, and it will not be a straightforward task to
encourage a reverse in action. If the expected rise in production is less than
300,000 barrels a day, we can’t rule out the possibility that there could be a
rebound in prices.
Although
both Saudi Arabia and Russia are thought to be actively encouraging an increase
in production behind the scenes, this will likely be opposed by Iran, Venezuela
and Iraq. While none of these three nations has anywhere near the amount of
influence over OPEC as either Saudi Arabia or Russia, there will be power in
numbers if other producers in the cartel reject the proposal to increase
supply. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html
This potential scenario does provide some light that traders would be mistaken
to consider the OPEC outcome as a “done deal”.
One
other factor that investors will need to carefully monitor is whether President
Trump is now attempting to exert some influence over OPEC. The United States
President has used social media to attack OPEC, and has in the past repeatedly
called out the cartel for “artificially” inflating the value of Oil. If the
market does attempt to appreciate on the OPEC meeting’s outcome, it could
encourage Trump to lash out at OPEC once again.
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