Oil price still likely to rebound only gradually - MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that the foreign exchange market is still digesting the announcement yesterday from OPEC that it has agreed to cut oil production which offers support for the price of crude oil and related currencies.

Key Quotes

“It has prompted the price of Brent crude oil to move back towards the top of its recent range between USD45 and USD50 barrel. OPEC announced that they have agreed to reduce output to between 32.5 million and 33 million barrels per day. In comparison OPEC pumped 33.2 million barrel per day in August. It was the first time that OPEC has agreed to cut production since during the global financial crisis in 2008.

The shift in strategy highlights increased concern amongst OPEC members over the persistence of low oil prices alongside building evidence that the market is taking longer than expected to rebalance. The IEA recently delayed their forecast for when they expected demand and supply to balance out until late into next year. If implemented fully the production cut should help to offer more support for the price of oil. The shift away from pursuing market share by Saudi Arabia and its willingness to compromise with Iran to reach an agreement is also a positive development for market sentiment.

However, doubts will remain over how effective the production cut will be at lifting oil prices. OPEC members have not yet agreed on how much each individual member has to cut production. A Committee has been set up to work on the matter and will report back at the next OPEC meeting in November. OPEC may find it more difficult to agree on individual levels for the production cut although Iran will be exempt, which is a major concession by Saudi Arabia.

OPEC members may even fail to implement the production cut fully dampening its potential impact on the price of oil. The power of OPEC members at influencing the price of oil has also been diminished. If the price of oil increases materially it could encourage non-OPEC members including US shale oil producers to boost supply providing an offset to the OPEC production cut.

Overall, we remain comfortable with our assumption that the price of crude oil will continue to rebound only gradually in the year ahead towards USD60/barrel by the end of 2017, which is built into our outlook for oil related currencies. Prior to the OPEC production cut announcement, we had become more wary that downside risks to our outlook were building.”