Oil: Crunch time for OPEC and all eyes on Vienna now - HSBC

Research Team at HSBC, notes that since OPEC’s surprise September announcement, negotiations have been gathering pace as OPEC has attempted to reconcile positions and formalise an agreement ahead of its meeting in Vienna on November 30.

Key Quotes

“Market sentiment on the likelihood of a successful outcome has ebbed and flowed since the original announcement but in recent days expectations have risen – helped by positive comments from the likes of Iraq and Iran – pushing Brent crude back up towards USD50/b.”

“The September announcement called for a curb in OPEC production to a range  32.5-33.0mbd. At the time, OPEC’s own estimate of its output (based on secondary sources) was 33.2mbd, implying a cut of 0.2-0.7mbd to achieve the goal. However, OPEC supply has since risen to 33.6mbd in October according to the same sources.”

“Having laid down a marker in Algiers risks putting OPEC’s credibility on the line. The September announcement was the first indication of co-ordinated OPEC action for some years, so the organisation’s ability to deliver on it is likely to be closely watched.”

“The tone of comments from the likes of Saudi Arabia, Iran and Iraq in recent days make us think the organisation will probably be able to settle on an agreement in Vienna. In practice, this may not result in a meaningful reduction in supply at all, particularly if volumes recover in Nigeria and/or Libya, but we think that’s less important than the psychological message it would send to the market.  A successful outcome would probably see Brent consolidate above the USD50/b level, but further near term upside may be limited after the strength of the recent rally. In contrast, if the outcome is not positive, we wouldn’t be surprised to see Brent temporarily back in the low-to-mid-USD40’s.”

“Either way, we see the global oil market moving back into balance in 2017. By that stage, we expect an increasingly obvious lack of global spare capacity to shift the market’s attention onto the ability of supply to meet growing demand.”

“Our Brent price assumptions remain unchanged at USD60/b for 2017e and USD75/b for 2018e, reflecting our view of this return to balance and of likely increasing evidence of supply constraints starting to emerge thereafter.”