Oil Markets On Edge Ahead Of OPEC Meeting

The OPEC+ chatter this week is unbearable. Analysts, traders, and media alike have spent considerable time reading tea leaves to determine what course OPEC+ will take at its next round of meetings, scheduled to begin over the weekend.

Analysts have reviewed breakeven points for OPEC members—figures that could reveal the oil prices at which OPEC+ members would have no choice but to cut production to move prices back into comfortable territory. Analysts have reviewed OPEC’s historical decisions and the fundamentals and market conditions that have led them to make those decisions. Global inventories, Russia’s exports, and China’s imports have been scrutinized despite not having any real data to go by. And analysts—and particularly sensitive journalists—have spent a considerable amount of time vilifying OPEC+ for its threats made to oil speculators and its decision to keep major news outlets like Bloomberg and Reuters out of the OPEC+ meeting festivities.

Does OPEC really have a set Brent price that will trigger another cut? Are China’s imports really as disappointing as some are making it out to be? Are crude inventories too high in the U.S.? How much of a role do fundamentals play in OPEC’s decision-making?

OPEC’s decision-making has traditionally been a mix of fundamentals and emotion. Saudi Arabia and Russia launched a price war a few years ago by way of unrestrained production when oil’s fundamentals hardly called for that level. But typically, OPEC’s moves have been seen as fairly sober.

This time around, the bone of contention, as voiced loudly by Saudi Arabia, has been speculators vs. OPEC. Of course, since speculators—shorters, market manipulators—have a trickier time banding together, OPEC will surely have the upper hand here. Saudi Arabia’s Prince Abdulaziz bin Salman has repeatedly lashed out at oil’s short sellers, and warned them in no uncertain terms that they should watch out. In April, bin Salman insists, he left short sellers in a painful spot when OPEC+ decided to cut 1.1 million bpd when no one expected it. It did fail, however, to permanently rally prices for OPEC.

We see a real possibility that fundamentals could take a backseat to bin Salman’s thirst for punishing short sellers. In response, there has been a pullback in crude oil shorts since bin Salman’s threat was made, with money manager shorts falling by 18.37 mb to 201.03 mb across the four main Brent and WTI contracts, according to Stan Chart. Meanwhile, longs rose 15.03 mb. There is just enough time for one more set of positioning data to be made available to bin Salman before OPEC makes its decision. If that data shows a reduction in crude oil shorts, there is a fair chance OPEC will not make any changes. But if shorts hang on to their positions, OPEC could make good on its threat, and send them a message by cutting production targets even further. Whether those cuts will be realized, however, is another matter altogether, but OPEC needs only to cut the targets to inflict pain on the shorters.