The ridiculous headline risk that is whipsawing oil showed up this morning once again. WTI slide as much as $41.26 earlier on news that Iran's Oil Minister Bijan Namdar Zanganeh wouldn't be attending the April 17 meetings in Doha, however just moments later it was reported that Iran's OPEC Governor Kaempour will be attending and losses were largely erased.
Elsewhere, BofA is out with a report saying to "Reduce risk heading into the Doha meeting." The bank has developed four possible scenarios, and say that freeze or no freeze, due to a drop in US supplies and rising global demand the oil market is already rebalancing and project oil prices to trade on average above $50/bbl next year.
Truth be told, there is hardly any information on what will be discussed at Doha this Sunday. So in this note we develop four possible scenarios: back to a price war, no output freeze, a soft output freeze, and a hard output freeze with some enforcement mechanism. In our view, the last two scenarios would send Brent prices above $50/bbl in relatively short order, while the first two outcomes could lead to a price drop below $40/bbl. Having said all that, the global oil market is rebalancing, freeze or no freeze, due to a drop in US supplies and rising global demand. Stocks are set to draw structurally starting in 4Q16, in our estimates. So we still project oil prices to trade on average back above $50/bbl next year.
However, politics could trump economics introducing a bearish outcome as a possible scenario if Saudit Arabia doesn't play ball, which could see oil retrace to the $30-35/bbl range. Incidentally Saudi Arabia hit the wires this morning with reports Oil Minister Ali al-Naimi said "an outright production cut is out of the question, forget about this topic".
In the very near-term, however, a bearish outcome in Qatar is a possible scenario. While we see room for cooperation between OPEC and Russia, we also acknowledge that Doha could end up being a repeat of the December OPEC meeting. In other words, Middle East politics could once again trump oil economics. So should Saudi announce an additional output expansion in response to Iran’s return to market, Brent prices could retrace to the $30-35/bbl range. But even under our base case of "no output freeze", long positioning is sufficiently stretched to warrant a near-term pullback below $40/bbl. Given the uncertainty, we advocate reducing longs ahead of Doha.
This is where it gets interesting because as BofA notes, Russian oil production is set for a decline sequentially from Q1 due to lack of investment and accelerating field decline rates, meaning that in their view, any cuts would have to come from the Saudi's, and based on comments this morning this seems like a very remote possibility.
There is one saving grace perhaps that there could be a deal made to freeze output. Russia and Saudi Arabia have middle ground in that below $50/bbl they both are impacted on the current account / revenue side of things.
In summary, BofA has set four possible outcomes that come out of the Doha meetings, with no production freeze being the most likely outcome, but price war being possible as well - both bearish for oil.
Finally, and perhaps most important, is that OPEC came out this morning with a warning on perhaps the biggest wildcard of all: global demand for oil, which OPEC now declining. The now defunct cartel sees 2016 demand growth ~1.2m b/d vs previous estimate of 1.25m b/d.
Cited by Bloomberg, OPEC believes that weakness in Brazil’s economy, the removal of fuel subsidies in the Middle East and milder winter temperatures in the northern hemisphere could prompt further cutbacks, the group said.
"Current negative factors seem to outweigh positive ones and possibly imply downward revisions in oil demand growth, should existing signs persist going forward," the organization’s Vienna-based secretariat said in its monthly market report. "Economic developments in Latin America and China are of concern."
Perhaps this is just posturing in hopes of actually bringing the parties together to reach an agreement to freeze output. However if BofA's most likely scenario plays out, and demand continues to fall, who knows how far we fall. If that's the case, it may be a good time to check in with the Dallas Fed and ensure they aren't telling banks how to handle energy loan exposure.