OPEC+ Meeting Preview

Although OPEC+ is expected to affirm the decision already taken last week, the clock is ticking for the cartel to come up with a new production plan to suit current circumstances.

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It's not time for a change yet

The crux of the issue OPEC+ has to deal with is that after this meeting, its current production plan effectively runs out. Last meeting the cartel agreed to bring forward the planned production hike in September and divide it between July and August. At this meeting, members are expected to affirm that agreement.

But after that, there is no consensus on what to do with crude production, since the agreement made almost a year ago effectively runs out in August. The next meeting will have to decide what to do going forward.

With a vastly changed global landscape thanks to the war in Ukraine and high crude prices, the negotiations could be quite complicated. If OPEC doesn't provide any clues to what each member is looking for at the next meeting, the market could have a month of increased uncertainty and volatility in price.

What could happen?

The ministerial meeting ended yesterday with no change to the recommendation, meaning the technical committee hasn't advanced discussions on a new production plan. Earlier in the week, OPEC reported that members were struggling to meet targets and that spare capacity has continued to dwindle. This poses a problem as global crude demand is pre-pandemic levels next year.

Even as Gulf producers promise to increase production, that is simply covering other exporters struggling to meet their quotas. Russian production has already dropped by 800K/bpd, and could drop by 2M/bpd if/when Europe finally implements its ban. The next event in focus is President Biden's trip to Saudi Arabia in an attempt to boost production.

WTI retests 50-SMA

The price of crude oil has been on a steady decline since the high of $123/bbl on June 8. It slid to the 38.2% Fibonacci retracement of the rally since December near $104/bbl. A brief rebound peaked at the 50-day average of $112/bbl and reversed, leaving a bearish engulfing formation back.

Should it remain below the resistance, it is prone to further downside towards the $100 rebound number as well as the 50% and 61.8% Fibonacci levels near $95/bbl and $85/bbl. Inversely, moving past the 50-day average would expose $123/bbl, and above there the multi-year high of $130.50/bbl.

Source: Spreadex trading platform

Key takeaways

Markets expect OPEC+ to bring forward the planned production hike in September and divide it between July and August. But the next meeting is going to be more difficult to predict since the production agreement made almost a year ago effectively runs out in August and no-one knows what to expect now. As such, we might see a rollercoaster of price changes until there is more clarity from members.

The recent OPEC+ meeting did not yield any decision despite reporting its inability to meet the target of production. The oil market is in a state of urgency as there are not enough places left to produce oil and demand is not only rising without Russian production but it is expected to surpass pre-pandemic levels next year.