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26th November | Dubai
Views by Aberdeen Standard Investments, Investment Strategist Bob Minter
Hopes are high for the OPEC meeting on 30 November. A programme of cuts to supply that was initiated by OPEC and some non-OPEC members (we’ll refer to the two collectively as ‘OPEC/NOPEC’) last year has seen the oil price steadily rise from its lows to just short of $60 a barrel at the moment. The presumption from investors is that those cuts to production will be extended for a further nine months into next year. Data from the Commodity Futures Trading Commission (CFTC) shows that bullish speculative positions on the future price of crude oil are at all-time highs.
Investors are getting ahead of themselves. OPEC will surely extend the programme of cuts – it’s hard to imagine they’d let markets get this far ahead of themselves without any basis – but there’s plenty to suggest that the cuts won’t be extended by the full nine months.
The OPEC/NOPEC alliance isn’t as tight as it was. Tensions in the middle east have increased since the agreement was made. This is making dialogue ahead of the meeting amongst the various countries more challenging and harming the chances of them coalescing on a common position.
Even if there is decent cohesion amongst OPEC/NOPEC, the group is likely to see risks in extending the cuts for nine months. Supply disruptions are at historically low levels of around 1.5 million barrels per day at the moment and that’s unlikely to continue. Venezuela is at risk from a lack of capital for maintenance and additional development. While Nigeria is due to see an end of a truce with the Nigel Delta Avengers, a militant group that has previously attacked installations and pipelines.
If supply disruptions increase then this will push prices up to a level which will see suppliers outside of the OPEC/NOPEC deal return to the market, regardless of any extension. OPEC/NOPEC ultimately doesn’t want prices much higher than where they are currently partly for this reason.
Russia has grown weary of supply restrictions. This is borne out by their actions as they continue to develop new extraction sites and pipelines to increase export capacity. This will see them actually raise production as they look to increase tax revenues for the government. Russian companies have been very vocal about their concerns that the rebound in the oil price has seen US producers come back to the market and take market share. These are not the actions of a country looking to restrict supply.
Developments in China are making the market appear fundamentally better than it is. Imports of crude oil in September were amongst the highest on record. Some of this was down to large purchases into government storage facilities but these do not represent a sign of sustainable demand. It’s simply shifting the storage of global oil supplies from one place to another. Meanwhile, the addition of two large refiners that will likely increase Chinese demand by 600,000 barrels per day. But much of this will be exported so the refineries do not represent some significant uptick in domestic Chinese demand.
An extension of the OPEC/NOPEC agreement is more than likely. OPEC has increasingly borrowed the concept of forward guidance from central banks to guide markets as to its thinking. They would not have let the belief in an extension linger this long if it wasn’t likely. But it’s more likely that they get extended to some point in the second quarter of next year. Global oil markets are a tapestries of competing pressures with myriad interwoven domestic and international sensitivities and politics. Investors should remember that as their enthusiasm builds towards the OPEC meeting.