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Oil Price Fundamental Daily Forecast – Traders May Use Production Cut Disappointment as Excuse to Book Profits

The lower price action suggests two things, the size of the production cut was already priced into the market, and traders wanted more than just a three month extension of the output curbs.
James Hyerczyk
Crude Oil

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are edging lower on Friday shortly after the regular session opening. Nonetheless, the markets are set to post a weekly gain as OPEC+ kicks off its meeting in Vienna.

OPEC and its allies including Russia, agreed in principle on Thursday to more output cuts in an effort to trim the global supply and stabilize prices. The move is designed to combat stagnant global economic growth blamed on the U.S.-China trade war. OPEC+ stopped short of pledging action beyond the first quarter 2020, causing analysts and traders to question the impact of the latest curbs.

At 13:03 GMT, January WTI crude oil futures are trading $58.27, down $0.17 or -0.31% and February crude oil is at $63.31, down $0.08 or -0.13%.

The New Deal

According to reports, the cuts will expand the existing agreement by an extra 500,000 barrels per day (bpd) reduction in the first quarter next year, through tighter compliance and some adjustments. OPEC’s current agreement is a supply cut of 1.2 million bpd and the increased amount represents about 1.7% of global oil output.

OPEC is likely to shoulder 340,000 bpd in fresh cuts and non-OPEC producers an extra 160,000 bpd, one source said on Friday.

Saudi Aramco Initial Public Offering

Higher oil prices are also supporting the initial public offering (IPO) of Saudi Arabia’s state-owned oil company, Saudi Aramco, which priced its shares on Thursday at the top of an indicated range.

The sale was the world’s biggest initial public offering, beating Alibaba Group Holdings’ $25 billion listing in 2014, but fell short of a $2 trillion valuation for Aramco sought by Saudi Crown Prince Mohammed bin Salman.

Daily Forecast

The lower price action suggests two things, the size of the production cut was already priced into the market, and traders wanted more than just a three month extension of the output curbs.

“Despite the deeper potential cuts, we view most headlines so far as falling short of consensus expectations,” Goldman Sachs said in a note citing factors including the short duration of the deal.

One sticking point has been compliance with the cuts especially since Saudi Arabia trims more than required in order to offset overproduction from Iraq and Nigeria.

“A scenario where the Saudis ‘absorb’ the majority of a 500,000 bpd cut and formalize their target at current output levels would not be impactful to the market – unless Iraq and Nigeria come into compliance with their targets,” said analysts with Jefferies.

ING bank analysts said the key question was whether the new cuts were real or just a matter of Saudi Arabia formalizing its current over-compliance.

“Obviously, if it is the latter, the market will be disappointed, as this will do little to eat into the surplus over the first quarter,” ING said.

The price action suggests that traders may use the OPEC+ decision as an excuse to book profits. So unless there is a major positive development in the trade talks, prices are likely to be under pressure on Friday.

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