All eyes are on OPEC's December meeting

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11/16/2018 | 12:41 pm
The WTI crude oil price rebounded on Friday amid expectations that the OPEC will cut supply. This comes after a bearish rally that began in early October. But nobody knows for sure what will happen at OPECís meeting next month.


The barrel of WTI held above a support level of $55 at yesterdayís session, while the Brent bounced back to $66, giving investors some hope that the oil situation would improve. But there are too many unknowns.

The barrel of oil has been in a sell-off since the beginning of October, making it difficult for the price to stabilize.
 


Oil prices have plunged more than 20% since the start of October. The strongest daily drop happened on November 13. Source Bloomberg
 
This plunge was caused by several factors including Trumpís tweets, the Iran situation, the release of an OPEC report in which it lowered its demand forecasts for 2019, the strong dollar and larger than expected builds in U.S. crude oil inventories.

Concerned about the risk of an oversupply of oil, Saudi Arabia said on November 12 that it anticipates a reduction in its production that could boost the prices of WTI and Brent. It is planning to cut its oil production by 500,000 barrels per day from December.

The kingdom said that oil producers should cut 1 million barrels a day from October levels. But nobody knows for sure what OPEC will do, prompting worries among investors. It is possible that OPEC will reduce its output, but it could also very well decide against it and flood the market with oil.

December is still far away and many things can change in between: with lower oil prices, Chinese refineries could decide to increase production. Oilsands barrels from Canada are also adding to the equation, as the country encountered issues with production lately. In addition, the US could reduce shale oil production as it canít compete on price with the rest of the world, but also due to rising interest rates, as the industry heavily relies on financing from banks. Indeed, every six months, oil and gas producers negotiate with their banks how much credit they should receive based on the value of their reserves. Still reeling from the epic oil rout in 2014-2015, banks are very afraid of volatility.

So, although there is greater production than demand right know, whoís to say that it wonít change tomorrow? Letís wait and see: OPECís meeting will take place in Vienna on December 6.
Romain Fournier
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