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Be careful counting your chickens

  • 28Nov 17
  • Robert Minter Investment Strategist, Aberdeen Standard Investments

Investors should temper their bullish expectations of this month’s OPEC meeting.

Hopes are high for the OPEC meeting on 30 November. A programme of cuts to supply that was initiated last year by OPEC and some non-OPEC members (we’ll refer to the two collectively as ‘OPEC/NOPEC’) has resulted in the oil price steadily rising 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.

Middle East

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 among the various countries more challenging and harming the chances of them coalescing on a common position.

Supply disruptions are at historically low levels…and that’s unlikely to continue.

Supply

Even if there is decent cohesion among 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. Meanwhile in Nigeria, a truce with the Niger Delta Avengers - a militant group that has previously attacked installations and pipelines - is due to come to an end.

If supply disruptions increase, this will push prices up to a level where suppliers outside of the OPEC/NOPEC deal will 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

Russia has grown weary of supply restrictions. This is borne out by its actions as it continues to develop new extraction sites and pipelines to increase export capacity. Russia will increase production as it looks to increase tax revenues for the government. Russian companies have been very vocal about their concerns that the rebound in the oil price has resulted in US producers coming back to the market and taking market share. These are not the actions of a country looking to restrict supply.

China

Developments in China are making the market appear fundamentally better than it is. Imports of crude oil in September were among 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 refineries is likely to 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. It would not have let the belief in an extension linger this long if it wasn’t likely. But it’s more likely that the agreement is extended to some point in the second quarter of next year. Global oil markets are a tapestry of competing pressures with myriad interwoven domestic and international sensitivities and politics. Investors should remember that as their enthusiasm builds in the run-up to the OPEC meeting.





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