Market commentators must be longing eagerly for Wednesday and the meeting of the Organization of the Petroleum Exporting Countries (Opec). Picking the latest official oil producer statement to explain the latest oil price move has become a boring exercise.
The fact that Saudi Arabia cancelled a meeting with Russia was reason enough for prices to sell off almost 4% on Friday. Our view remains unchanged. Chances are high that the group will announce supply measures.
Saudi Arabia was very outspoken on an agreement and needs a deal to safeguard its credibility. However, the deal is unlikely to sustainably influence prices because sizeable producers are exempt and because Opec historically has a poor track record of quota compliance.
The past weeks’ back-and-forth of diplomacy reveals how small the common denominator is, while cheating on quotas is simply too enticing in today’s environment of budget constraints.
Both reasons suggest that any deal will have a short shelf life. Most importantly, higher oil prices are unlikely lasting as they would add further fuel to the reviving US shale boom and delaying the intended market rebalancing.
While oil prices might surge beyond USD 50 per barrel on positive sentiment related to an OPEC deal, we remain comfortable with our longer-term outlook of sideways-trading prices.
Oil sold off on Friday on news that a meeting between Saudi Arabia and Russia was cancelled. Finally, this Wednesday’s Opec meeting should put an end to the back-and-forth of oil diplomacy.
Chances for a deal are high but we remain sceptical that it has teeth and see no lasting impact on prices.
Norbert Rücker is head of Commodities Research at Julius Baer