Oil Price Fundamental Daily Forecast – Bias Shifts to Downside if OPEC+ Delivers Less than Expected

U.S. West Texas Intermediate and international benchmark Brent crude oil futures settled lower for a third session on Monday as OPEC and its allies, including Russia, sought more time to reach a deal on production policy after a meeting earlier in the day broke down without an agreement.

What this likely means for traders is a few days of choppy price action with a possible bias to the downside because of the uncertainty created by the news. Traders tend to sell when there is uncertainty in the market.

I don’t think it indicates good news, but rather a balanced disagreement between those oil ministers who see the market as too fragile to absorb additional barrels of oil and those who seem to be willing and able to pump more to take advantage of higher prices following the recent news about successful COVID-19 vaccine trials.

The oil ministers will now meet on Thursday rather than Tuesday to allow more time to deliberate on whether to delay a planned increase in output from January.

A few weeks ago when oil was testing 50% of its April to August rally, the idea of curtailing the planned production cuts seemed like a slam dunk and prices firmed accordingly as speculators bet on the move taking place.

However, since then traders have grown more optimistic, posting the biggest monthly gain since May, on optimism energy demand will rebound as COVID-19 vaccines are rolled out in the coming weeks.

According to Bloomberg, “OPEC+ talks have been complicated by the price gain and cracks have appeared in the alliance, with Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman signaling his dissatisfaction with the situation on Monday by telling others he may resign as co-chair of a committee that oversees the output deal.”

The main cause of the friction at the meeting seems to be centered on some oil ministers looking to keep cuts for another three months, the United Arab Emirates issues with quotas and Kazakhstan’s problems with an extension.

In order to solve the problems, OPEC+ may have to make concessions that could be in the form of a shorter extension and then a gradual increase in production.

“OPEC+ is stuck between a rock and a hard place because near-term indicators show Europe and U.S. demand is weak, but Asia is stronger,” said Vivek Dhar, a commodities analyst at Commonwealth Bank of Australia. “Even though it’s a sign that the fracture within the group is deep, the fact that they’re willing to give two days to sort out disagreements is a positive sign.”

To some it may be a positive sign, but I think traders have priced in more than OPEC+ may be willing to deliver so my bias is to the downside.

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