Crude oil remains stuck in a relatively tight range in the run up to key meetings in Vienna. The Opec meeting on June 22 will be followed by a joint meeting with non-Opec producers on June 23. Up for discussion is a potential reduction or revision to the 1.8 million barrels/day production cut deal, which since January 2017 has supported a +60% recovery in the price of Brent crude oil, the global benchmark.
After reaching $80/barrel on Brent crude last month and after seeing Opec’s production continuing to slide – not least due to sustained declines in Venezuela – the call for action has grown louder. Ths is particularly true in the cases of Saudi Arabia and Russia, both of which have expressed concern about the potential damage of rising oil prices to global growth and demand.
The inability of most of the 14 Opec members to increase production, especially Iran (US sanctions), Iraq (lack of investment), and Venezuela (economic collapse) has raised the temperature ahead of the meeting. Geopolitical tensions are likely to resurface with US sanctions on Venezuela and soon Iran too being seen as providing Saudi Arabia an unfair advantage as it would gain market share from a production increase.
Having fought so hard to achieve higher prices it is safe to say that both Saudi Arabia and Russia will do their best not to rattle the market. On that basis, increasing production by more than what has been and will be lost from Venezuela and Iran is unlikely to occur. Given the resistance from other Opec producers it is likely that the production ceiling will be maintained but that an increase of between 500,000 and one million b/d will be agreed.
Hedge funds have been net-sellers of crude oil for the past seven weeks. This, the longest losing streak since 2013, has returned the net-long to 790,000 lots (790 million barrels), an eight-month low. On that basis the continued pressure from long-liquidation is likely to fade soon thereby limiting the downside price risk.