On Sunday the OPEC/Non-OPEC countries meet to discuss the potential for oil production freeze in Doha. In front of the meeting, markets look fairly cautious but what is expected? There are probably three main outcomes from the meeting on Sunday which are laid out below, whilst also looking at the potential impact on oil and also other asset classes. Once more it seems as though volatility is likely to be the main winner.
Scenario 1 (most likely)
An agreement is reached on a production freeze. Iran will not be taking part but agrees to some sort of future action to curb production. This helps to placate other countries concerned by Iran not taking part in the initial production freeze (there is still a big battel amongst producers for market share) and therefore a deal is made.
IMPACT: This outcome has mostly been priced in by the market however would still be considered to be a relatively decent outcome, Potentially there could be further (mild) gains in the oil price with WTI towards $43.50 and Brent Crude towards $46.25. However there could be an uncertain market response as there is also the prospect of a “buy on rumour, sell on fact” move, with a market that has mostly priced in this scenario.
Scenario 2 (reasonably likely)
Iran will not be sending its oil minister (instead just sending his deputy) so this could hamper the prospect of an agreement involving Iran. With Iran refusing to take part in a production freeze and resistant to future curbs too, the other countries take this badly and the talks end up with no agreement. Unfortunately with the run up in the price recently there could be a short-sighted view that up over $40 the near term outlook is deemed to be workable for producers and therefore the appetite for a broad agreement is reduced.
IMPACT: This is the most bearish of the outcomes and this would produce a sharp move to the downside on oil. Initial supports comes in at $34.80/$35.25 on WTI oil and $37.25 on Brent Crude. However these could just be initial levels and if the bears get going we could be looking at a retest of $30 on both oil prices in due course.
Scenario 3 (most unlikely)
Iran goes against all signs so far in the run up to the meeting and agrees to a production freeze along with all other participants .(I suppose you could also get a fourth scenario with one involving production cuts but this has to be extremely unlikely.) Everyone comes out smiling and the markets are bulled by the prospect that this collection of self-serving countries can actually function as a serious cartel once more.
IMPACT: A significant bullish move on oil, with strong further gains. WTI could be seen pushing towards the Q4 2015 resistance levels of $48/$51 with Brent Crude towards $51/$54.
However there will also be an impact on sentiment across markets:
- Scenario 1 (mild positive) – is likely to be seen as generally supportive for risk appetite but essentially does not change a great deal as the market has been largely priced for this. The equity markets still have a close correlation to oil and would therefore help to bolster support. The move may not change the outlook for the dollar too much (which is still under pressure), although could help to stabilise the fears over global growth (which would ultimately be supportive for the dollar in the medium to longer term). It could also take away some of the demand for the Japanese yen in the near term whilst gold would also come under a bit of pressure.
- Scenario 2 (bearish) – would see gold higher, and the yen being the main beneficiary. Yen pairs are hinting towards this scenario on Friday afternoon. Equities would come under some stinging selling pressure and Treasury yields would fall.
- Scenario 3 (bullish) – is very bullish for risk appetite with commodity currencies soaring and equities boosted. The yen would be the casualty here, whilst gold could also suffer, and Treasury yields would pull strongly higher.