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Oil Soars to Two Year Highs as OPEC Meeting Flies Under the Radar

OPEC’s meeting in Vienna at the end of the month appears to have flown under the radar – for now.

OPEC’s General Secretory, Mohammed Barkindo, promised in October, that he would take “extraordinary measures” in order to restore the stability of the oil markets. Barkindo did not spell out what the measures were but it appears that things are moving in the right direction. The cartel’s Vienna meeting is just a week away, and the oil markets are rallying. Will we start to see risk priced into the commodity? FXTM’s Research Analyst, Lukman Otunuga, shares his thoughts.

Oil hit two-year highs yesterday, buoyed by news that U.S crude stockpiles are declining. Reports that the Keystone Pipeline permit might be revoked, added to concerns America is now headed for a crude shortage, further complementing the upside.

OPEC’s meeting in Vienna at the end of the month appears to have flown under the radar – for now. The bulls are widely expecting production limits (currently due to expire in March 2018) to be extended, but any negative or unexpected news from the meeting will likely put the brakes on the current rally.

Could OPEC Production Cuts Be Extended?

Member states Iran and the UAE have both been vocal in their support for extended production cuts. Saudi Arabia and Russia – two of the world’s biggest producers – are also thought to be in favour of an extension to the market balancing initiative.

Saudi Energy Minister, Khalid Al-Falih, is reportedly on a charm offensive, attempting to secure the attendance of key global producers from Africa, Latin America and Central Asia. Increased output from U.S Shale producers this year has been a major bug-bear for the cartel, hindering its ability to eliminate the supply overhang and limiting the market upside. The more support Al-Falih can raise from oil producers, the more favourably traders will view future cuts.

What Challenges Does OPEC Face?

Perhaps the biggest test of the group’s commitment to addressing oversupply issues, will be how it handles Libya and Nigeria. Both OPEC members are currently exempt from the deal but, with a combined output of 694,000 bpd between January and September, the two are a massive handicap for the cartel’s market balancing initiative.

When U.S trade embargoes on Iran were lifted in January 2016, it was granted a small production increase. With Saudi-Iranian tensions dangerously fraught going into the meeting, it is unlikely that this favour will be extended again. Tensions in the region typically push the price of oil up, a factor likely contributing to current bullish sentiment.

Compliance with production cuts has been a persistent problem, and how OPEC intends to address the issue should the restrictions be extended, will be carefully scrutinized. Iraq, the group’s second largest producer, has consistently failed to stay within its target, while Saudi ‘gamed’ the system by pumping below its limit at the start of the year. If group fails to address issues with compliance, particularly amongst its biggest producers, investors will continue to question its ability to rebalance the markets long-term.

Price Rallies Tempt Producers

The current rally – though likely to be short-lived — is poorly timed for the cartel. Rising oil prices will test the resolve of producers, and many will be keen to capitalise on short-term gains. U.S Shale producers will be just as tempted by rising prices, and any increase in output from OPEC’s main competitor will hurt efforts to address the supply glut.

While Saudi Arabia is reportedly lobbying for a nine-month extension, there are a number of other options open to the OPEC-led group. Russia has been careful not to declare its position publicly, but the world’s largest crude producer is generally assumed to support a six-month extension. Alternatively, the group could opt for a more lenient three-month extension, or simply defer the decision entirely.

Long-shot third parties are everywhere this season. That says something about Americans’ perspective on the economy.