A rise of 15% in the July Brent futures since the May 5 this year has seen money managers once again place long bets on OPEC extending production cuts at this Friday’s meeting.
The challenge OPEC is facing is one of expectation. The oil market is pricing in an extension of the current cuts for the next nine months already. If this is the case then the 15% upward move could potentially come under pressure as the market rebalances, and takes stock of what this actually means.
Saudi Arabia was quick to cut production, whereas Russia, although not an OPEC member is co-operating with OPEC took almost five months to implement their cuts.
So does the expected extension mean a resumption of the bear trend, or will this be enough to hold the market at current prices?
Geopolitical tensions in the region make OPEC deals difficult to impose. Iran continues to overproduce as it looks to fund its three-year fight with ISIS. This over-production and the continued emergence of the shale oil producers is making the production cuts less effective than OPEC hoped. For the cartel it is essential that all members maintain their cuts, and any further break in the ranks now could send the black gold into back into a bearish trend.
The white elephant in the room is The Donald. The Trump administration seems intent on isolating Iran, and it is possible that it could once again introduce sanctions on the Iranian government. Sanctions would be considered bullish for Brent, and this could be one of the bigger impact plays going on in the market.
The Commitment of Traders report – which indicates what is happening behind the scenes of each futures market has the producers as net short, so it is unlikely there will be a big surprise in terms of further cuts. However the Trump effect, and the political uncertainty on home soil, has pushed the USD index below 97, and this is also having an impact on commodity prices.
For oil traders, it might be enough to continue buying the rumour at this point, but the Tump effect may be enough to keep market longs in the game, even on ‘as-expected’ news from OPEC. Dip we might, but production cuts are starting to slowly filter down to the global inventories, and there is evidence that they are working.
Ultimately, with most of OPEC’s members now singing from the same song sheet, inventories have started to draw. We may pull back ahead of the OPEC meeting, but with evidence that the cuts are working, money managers could be reluctant to sell ‘the fact’ and maintain or even add to their current long positions.