In the past few weeks, we have expressed our view why the much anticipated OPEC Doha meeting on “freezing” oil production will be one of the biggest “sell the news” events when it comes to oil. Yesterday, even Goldman opined why the OPEC Doha meeting will likely be a dud when Damien Courvalin said: “Don’t Expect A Bullish Surprise.” Now, we present the view of Bloomberg oil strategist Julian Lee, who says “Doha Freeze talks, if anything, look bearish for oil.” Here’s the simple reason why.
Crude oil’s ~35% rally since Doha talks were announced in mid-Feb. shows a market expecting OPEC, non-OPEC nations to proceed with plan to freeze crude production at Jan. levels. Russia, Saudi Arabia are among at least 16 producing nations w/ ~60% of global crude output attending an April 17 meeting in Doha to discuss production freeze
That price rally may have gone too far given that Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman said late last mo. that freeze plan depends on Iran, all big producers participating
Iran, among those expected to attend, looks almost certain to reject curbs on its own output: Country has said it won’t allow its exports to be restrained and is seeking to bolster them after lifting of sanctions; needs oil revenue to rebuild its economy; plans to raise output to 4m b/d by March 2017 from 3.2m last mo.
Best that can be hoped for from Doha mtg is an output freeze that won’t take any oil off market and would simply allow several of the biggest producer countries to keep pumping at or near record levels. That’s unlikely to provide much additional price support given size of the rally that’s already occurred this year.
If Saudi Arabia really won’t accept Iran restoring its output as planned, then output freeze plan has a very high chance of unravelling either at the meeting or soon after.
Even if there is an agreement, uncertainties over definitions of what is included, whether it is based on production or exports, baseline for and duration of freeze, monitoring and enforcement could all reduce effectiveness.
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Meanwhile, however, it is all about forced short squeeze and stop hunts. Expect volatile pricing in the next few days. The good news is that after Sunday the oil market will be out of headline risk and trading can once again focus back on fundamentals.
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