OPEC is certainly going to be next week’s hot topic. On the 30th of November, we will know whether OPEC members have managed to coordinate a deal to freeze production. Saudi Arabia is pushing to convince other members to cut production to around 4%. Expectations that the supply glut could be reduced has sent crude oil higher. The commodity is recording its second consecutive weekly gain – above 47$ a barrel.
In our view, it seems difficult that the OPEC will reach an agreement as geopolitical uncertainties have been significant since Trump’s election. First of all, we believe that president-elect Donald Trump will follow through on his decision to render America energetically independent or at least he will push towards this direction. American drillers should benefit from this political view and we believe that shale gas is set to become more attractive. Trump’s plan for day one is to fire up US shale gas. This is why the oil oversupply is far from over.
Secondly, Trump’s policies are likely to boost interest rates and one major consequence will be a stronger dollar. As a result, there are downside risks for emerging markets for which a stronger dollar is definitely not great news, in particular for their oil demand as oil would become more expensive. This is why we feel that the OPEC is going to be reluctant to freeze production as it is perhaps too early to predict the real impact of EM demand regarding US policies.
Thirdly, another question that still needs to be answered is what foreign policies Trump will apply, in particular in the Iranian case. The strongest hypothesis for the time being is that the nuclear agreement reached in 2015 will be ripped up, in which case Iran would face renewed sanctions. Iran is now facing a difficult choice at the OPEC meeting, either agreeing on cutting production and not being able to produce enough oil before new sanctions arise, or refusing any cut knowing that US shale gas has become more attractive.
The geopolitical context is very mixed.
At the OPEC meeting, Donald Trump will remain at the centre of the debate and we believe that the intergovernmental organization will wait for the start of Trump’s presidency in order to better assess the geopolitical tone of the next four years. As a result, crude oil prices should adjust lower next week.