The next planned meeting of OPEC ministers in Vienna on November 27th is going to be anything but business as usual. Bear markets appear to be in full swing and OPEC has itself a problem as the price of crude oil continues to hit new lows; Brent crude is the lowest it’s been for over two years and West Texas intermediate (WTI) crude is down 20% from its June peaks.
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Source: U.S Department of Energy
Oil prices have been trending down since June largely because Libya and Iraq are back on the scene and production is on the rise in the US, Russia and Saudi Arabia. This increase in global supplies versus falling demand is proving the key driver behind the selling pressure. Each market is contributing to the current oil dynamic differently: US shale oil has boosted crude oil output to levels not seen in three decades; Russia is offloading crude oil to raise the cash it can’t borrow due to EU imposed sanctions and while Saudi Arabia, the world’s biggest exporter, was expected to cut production it reduced customer prices to Asia instead; a decision that is proving a bitter pill for OPEC to swallow. As the IMF reduced its global forecast for 2014 and 2015, the supply and demand issue was complicated further by the central bank’s concerns over the slowing global economic recovery.
Overall, the forecast suggests even lower prices but are unlikely to stay this low for too long. One thing that you can be certain of is more volatility and traders should keep a close eye on regular bursts of short-covering rallies. Both commodity and hedge funds are short but may alleviate the pressure on the market periodically by lightening up positions and taking profits. Given the bearish fundamentals, any short-covering rallies are likely to be sold.