The pace of oil price declines over the past seven weeks can be only matched by the 2014 bloodbath caused by the US shale revolution. Understandably alarm bells are ringing among key producers, who will meet on Thursday to discuss their response. Can they convince investors that the worst is over?
- OPEC to discuss output cut amid heavy price declines
- The Saudis would like to cut aggressively but face significant pressures
- Markets see a cut of at least 1mbd
- OIL above key support zone
Why have oil prices slumped by 30%?
Let’s start with the fact that the rally that led Brent (OIL) close to $90 was fueled by speculation that sanctions on Iran could result in a major deficit on the market. This proved to be wrong once Donald Trump granted waivers for 8 importers and (crucially) the Saudis ramped their output under the US pressure. Suddenly there was too much oil and traders had to scale back their bets in an aggressive fashion. On top of that, the US shale output expansion is unabated and this has resulted in a long series of inventory increases.
Can the OPEC change the situation?
There’s a perception that the cartel faces too many conflicts to produce a meaningful cut. Let’s consider the Saudis; taught by tough lessons from 2015, they’d love to cut output aggressively to ramp up prices but fear the US reaction amid controversy and outrage over the murder of journalist Jamal Khashoggi. Other examples are abundant – Russia said it would back the cut but its companies want to sell more oil from their new fields. Having said that, OPEC showed in 2016 that it still could impact the market and a decisive reaction now would be the first step. Markets are looking for a cut of 1 to 1.4mbd (million barrels per day) for 2019 from OPEC and Russia – a cut of less than 1mbd or a cut without a specified number could end in disappointment.
Technical analysis: OIL at key level
The OPEC meeting takes place at a very important time from the chart's perspective. Prices literally crashed from the 4 year high of $86.70 and stopped at the key support marked by a consolidation from early 2017. Although the lower limit of the channel has been broken this might be less important for as long as prices could climb back into it. Should a rebound occur, the key resistance will be seen at $70.50.
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