It's Opec's time to shine in financial news It's Opec's time to shine in financial news

Now that the french elections are safely behind us, investor attention will briefly move away from politics until the UK elections in June. So now that investors can finally switch off from political risks driving the markets (at least for a short while), the question needs to be asked: what is the next event risk? The answer to that is May 25, when the Opec is set to meet in Vienna; investors must circle this date in their calendars.

The bears are already circling and selling oil with weeks still to go before the event, scenting the air for more victims of the oversupply on world markets. My view is that there are at least two different risks for investors to account for in the lead up to Vienna.

While the Opec and non-members are currently committed to reducing output in order to tighten oversupply in the markets, the deal ends next month as it currently stands. At the moment, the markets are firmly on the side of the Opec and non-members extending their current agreement, which should in theory prevent the ongoing oversupply pressuring the price of oil back towards its historic lows below $30.

The main risk scenario at this stage would be a delay in renewing the agreement between Opec members and non-members. If the Opec appears ready to return to earlier record-breaking production levels, the bears would have a field day and drag oil prices lower. Markets would immediately take this as a sign that a volume war with US shale is back on the cards. The other risk case to take into account is that the Opec decides to not only extend the duration of the supply cut, but also volume of production. This would however create the impression that at least privately, it is being accepted that not much can be done to prevent shale production. While the volume war may not be over, shale would win yet another battle with it being universally accepted over the previous two years that the Opec no longer has the same control of the oil markets that it had before. It was only a few years ago that the Opec was in full control of global oil production.

The risk with the Opec deciding to extend the duration of the supply cut as well as the volume of production, is that it would at the same time weaken the credibility of the alliance, since it was previously prepared to allow the price of oil to be dragged lower in the hope of regaining market share from shale.

Bottom line though, it would mean a stronger rebound in the price of oil. Pride hardly counts when it comes to the real needs of oil-producing countries to boost government revenues. Saudi Arabia needs the oil price above $50 per barrel at all costs, and Nigeria dreams of $80.

The underlying problem is that US shale keeps snapping at the Opec's heels. It all comes down to the volume war between the Opec and US producers.

When the oil price went above $40, the shale industry turned the tap back on. Another potential problem around US producers is the stance from President Trump. He has previously expressed himself as being determined to boost his domestic industry. Most recently, he gave the green light to expand offshore exploration. Trump is firmly on the track towards "American energy independence".

What we can expect from the Vienna meeting is for the Opec to talk up the supply limit extension past next month, even into 2018. There is a caveat here: investors may shrug it off by pricing in the Opec's hints. An unimpressed market would mean a cap on price rises. I'd be surprised if the oil ministers either undermine, or confirm officially the possibility of an extension before the meeting. It would weaken their negotiating power before the event.

Playing coy in my view would likely be the best stance to take, because it would also keep Shale producers on their toes before the meeting takes place. It comes down to whether Opec and non-Opec members are willing to lose face by accepting defeat to shale in return for a boost in revenues. Or whether they are committed to waging the production war against shale. Who will blink first?

It's not likely to be Trump and shale; they've joined forces to make America independent of external oil producers.

The Vienna meeting may even have fresh surprises like new ideas from the Opec; it's difficult to tell with the oil markets being turned on their heads. In any eventuality, investors would be wise to be ready for anything.

The writer is vice-president of corporate development and market research at FXTM. Views expressed are his own and do not reflect the newspaper's policy.

Source: Khaleej Times