He who rises high falls painfully. Oil is now at risk of plunging into a wave of sales after achieving more than two-year highs if the OPEC meeting does not give the market what it expects of it. Goldman Sachs warns that given the current prices, positions in the futures market and the existing spread of Brent-WTI has convinced almost 100% of investors that the Viennese agreement of the cartel will be prolonged, at least until the end of 2018. If the results of the meeting disappoint, the massive curtailment of speculative net-longs will carry black gold far to the south.
Another confirmation of the excessive calm of investors on the eve of November 30 is the fall of the implied volatility to 22%. This is the lowest since March and is not far from the three-year low. If the OPEC does not want to allow a quick return of the North Sea grade of $ 50 per barrel, then it is obliged to extend the contract to reduce production by 1.8 million bpd. However, not everything will depend on the cartel.
First, the risks of increased production in US companies have not disappeared. According to forecasts of the US Energy Information Administration, the indicator will grow by 720 thousand bpd and exceed the level of 10 million bpd next year. In addition, Canada and Brazil are actively developing. If strong demand is contributing to the reduction of global reserves this year, it is not guaranteed that the same situation will take place in 2018. Secondly, investors do not have confidence that Russia will be able to, as before, support the OPEC's desire to stabilize the market.
Dynamics of Brent and volumes of oil production
Source: Bloomberg.
During the previous week, investors were agitated by information about the disagreement of the oil barons from Russia with the official position belonging to Moscow. Insiders from Reuters has allowed us to understand more deeply what is occurring. According to reliable sources, the production at the Sakhalin-1 project, a controlling stake which is in the hands of ExxonMobil, will increase by 200-250 thousand bpd in the first quarter of 2018. In order for the Russian Federation to continue to fulfill its obligations to reduce total production by 300 thousand bpd, it is required to implement a more serious reduction in production from other companies. They are already losing their market share so the displeasure of the oil barons is understandable.
Under the circumstances, Moscow can insist on a temporary postponement. For example, why not take a decision about the prolongation a little later? Perhaps in late March. The problem is that the market has already laid in the quotations of futures for Brent and WTI as the factor of extending the terms of the OPEC agreement and surely, this will arrange a large-scale sale. The question is not how far prices can go to the south. The question is whether they would arrange with Russia or not. The most likely scenario is that it will be satisfied with the previous trading range of $50-60 per barrel.
Technically, only the update of the November high is able to push Brent quotations to the target by 161.8% on the AB = CD pattern. On the contrary, prices falling below the support level of $ 60.75-61.15 per barrel will strengthen the correction risks in the direction of $ 59.5, $ 58.3, and below.
Brent, daily chart
