Renta 4 | Finally OPEC+ may have reached a tentative agreement to extend production cuts and the member countries could meet as soon as this weekend to sign it. Saudi Arabia and Russia wanted a firm commitment from those countries which were evading their quotas. So they have finalised an accord with Iraq to meet not only its share of the cuts, but even to compensate for past breaches.
Nitesh Shah (Wisdoom Tree) | OPEC+ had been readying itself for an earlier-than-originally scheduled meeting. That drove oil prices higher. However, disputes about compliance levels with quotas are casting doubt on moving the meeting to 4th June. If the meeting does go ahead this week, oil prices are likely to recoup intra-day losses on 3rd June. That could take Brent above US$40/bbl and WTI above US$38/bbl.
Nitesh Shah (Wisdom Tree) | With the coronavirus spreading around the world, the market is understandably scared that demand for crude oil will fall hard this year. Brent oil prices have fallen from a peak of US$68/barrel in the first week of January to US$56/barrel currently (24/02/2020). We believe that the backwardation in the Brent oil futures curve is generated by the fact that OPEC is ready to intervene.
The decision was announced last October and came into effect in the new year. The Government of Lenín Moreno decided to leave the cartel, led by Saudi Arabia, to escape the procuction cuts, with which the organization intends to boost oil prices. Oil is the second largest source of income for Ecuador’s coffers.
Carsten Menke (Julius Baer) | While the extension of oil production cuts was confirmed at the last OPEC meeting, discord emerged between Saudi Arabia and Russia about whether even deeper production cuts would be needed. Oil prices came under pressure, reflecting renewed concerns about global growth. We see prices trading slightly below fundamentally justified levels.
Countries in the Declaration of Co-operation (DoC, also known as OPEC) met in Vienna last week and announced a 1.2mn b/d crude production cut from an October 2018 baseline. In the end, OPEC interests came out first, as expected, and the rest of the world came second.
Francisco Vidal (Intermoney) | The next few days will be interesting as EU leaders confront the future of the European project, although they will also have to deal with the latest developments on Brexit, and no doubt dedicate time to US commercial belligerence.
One of the more interesting stories that seems to have flown beneath the radar of the foreign exchange market this week was that the US government has quietly asked Saudi Arabia and some other OPEC producers to increase oil production by around 1 mn barrels per day, according to Simon Derrick Chief currency strategist of BNY Mellon.
For any investor who believes that $70/barrel is more or less the right price, then the European oil firms are currently fairly priced. Alphavalue recently upped their earnings forecasts to include $70/barrel as a new normality. This leaves the sector with an upside potential of +6% on a 6-month horizon.
The price-inventory apparent mismatch of crude oil matters to the extent that going long crude appears to be a crowded trade so that the risks are on the downside if it were to happen that the “confirmed” cuts have been more paper ones than real ones.