The OPEC soap opera is coming to an end, and ANZ thinks the final scene will contain a production cut

JOE KLAMAR / AFP / Getty Images

Even the best soap opera writers would struggle to come up with a script as good as what we’re seeing with OPEC right now.

To tweak a well known phrase from a popular soapy, “like oil pumped to the surface, so too are the days of an OPEC member”.

It’s a drama alright, and one that will impact every person on the planet one way or another.

The degree of dilly-dallying we’re seeing from the most powerful crude cartel in the world is phenomenal, keeping markets guessing right up to the moment when it is scheduled to formalise proposed production cuts next year, agreed tentatively in late September in Algiers.

As my college Greg Mckenna mused earlier today, it continues to dance around and even a day before the meeting, making the chances of a production cut still look like a coin toss as the Saudis and Iranians retreat to their corners.

Couldn’t have said it better myself.

It’s a coin toss, seemingly, seeing the crude price tumble in recent days as traders fretted about the outcome of the meeting.

What looked like a near certainty is now anything but.

Brent Crude Hourly Chart. Source: Thomson Reuters Eikon

While the markets are now on tenterhooks as to what will eventuate later in the session, economists at ANZ remain confident that a deal to cut production to 32.5 to 33 million barrels per day will be inked.

Here’s the view communicated by the bank in its Wednesday morning note:

Our view is unchanged: we expect OPEC will reach an agreement at tomorrow’s meeting in Vienna. However, political manoeuvring continues unabated, with Saudi Arabia and Iran not in agreement on production cuts. Saudi Arabia remains steadfast in its belief that such cuts should be evenly spread across the group, while Iran is arguing it should be allowed to continue to ramp up exports. This apparent stalemate has seen investors take an increasingly bearish view on oil prices. In fact, net long positions are still at lows not seen since oil hit USD27/bbl earlier this year. Such political games are not uncommon and history has shown that the group can quickly shift. We believe OPEC’s resolve in reaching an agreement remains strong. Saudi Arabia’s energy minister, Khalid A. Al-Falih, has pointed to the short positioning in the market as a key reason for OPEC intervention.

Should an OPEC deal get over the line, ANZ says that a short covering squeeze should ensure that prices are likely to test the year high in Brent of $US53 per barrel “very quickly”.

On the contrary, should the deal fall over, the bank says not only will this “reduce OPEC’s relevance in the market even further”, but also certainly lead to the Brent price testing a strong support level at $US43-44 per barrel.

With front-month Brent futures currently sitting at $US46.44 per barrel, this suggests that the price risks, in ANZ’s opinion at least, are clearly slanted to the upside.

We’ll find out the answer to this theory soon enough. A press conference from the group is scheduled to begin at 4pm in Vienna (2am Thursday in Sydney). The outcome of the meeting may even be known before it even begins.

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