OPEC Forecast

We have taken a speculative position on the OPEC meeting in November.  There are arguments for both a deal and also a no-deal scenario.

I will briefly discuss both scenarios, then provide what our view is and why.  First, the argument for a deal stems mainly from economic reasons.  The oil prices are too low for several nations that require a higher oil price in terms of profitability.  The main countries in this camp are Venezuela, Nigeria, Brazil and Canada for example.  In addition, some of the major players have suffered as well such as Saudi Arabia and Russia.

Will this be enough to push through a deal?  The argument against a deal is that even if one is struck will countries keep to the agreement (cheating) and what about the US shale which will ramp up production on a very short cycle.

The best scenario would be a cut of 1 million barrels, then the question would be if the countries would cheat.  Thus any rally would be short term.  In addition, the shale producers will quickly ramp up production to negate this. Resistance to cut from Iraq and Iran is another factor on why a deal might not happen.  I don’t see this happening.

The consolation deal would be to agree to cut 500,000 barrels now and 500,000 barrels later.  This would in my opinion be a weak signal to the market.  There could also be other consolation deals and I believe the market will sell off in this case.

On the trading front, we have taken a relatively large position on the expectations of a no-deal or weak-deal scenario.